BSRJ and Commissioner of Taxation (Taxation)

[2021] AATA 333

BSRJ and Commissioner of Taxation (Taxation) [2021] AATA 333 (26 February 2021)

Administrative Appeals Tribunal

ADMINISTRATIVE APPEALS TRIBUNAL              )

)  No: 2018/3418

TAXATION AND COMMERCIAL DIVISION            )

Re: BSRJ

Applicant

And: Commissioner of Taxation

Respondent

DIRECTION

TRIBUNAL:  Senior Member R J Olding

DATE OF CORRIGENDUM:            9 June 2021

PLACE:  Sydney

The Tribunal directs the Registrar, pursuant to subsection 43AA(1) of the Administrative Appeals Tribunal Act 1975 (Cth), to alter the text of the decision in this application such that the following typographical errors in the Reasons for Decision dated 26 February 2021 are altered as follows:

a.the word “and” is inserted before the words “30 June 2015” in paragraph 2 of the text of the Decision;

b.the words “and 30 September 2015” are deleted from paragraph 2 of the text of the Decision; and

c.the words “31 March 2018” are deleted from paragraph 2 of the text of the Decision and replaced with “31 March 2016”.

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

Senior Member R J Olding

Division:                  TAXATION AND COMMERCIAL DIVISION

File Number(s):      2018/3418

Re:  BSRJ

APPLICANT

And  Commissioner of Taxation

RESPONDENT

DECISION

Tribunal:                  Senior Member R J Olding

Date:  26 February 2021

Place:  Sydney

1.The Applicant’s grounds of objection to the assessment of net amount for the tax period ended 30 June 2015 are extended to include that the discretion under s 29- 70(1B) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) should be exercised to treat a progress application by Construction Co for Progress Claim PC6 as a tax invoice.

2.The Tribunal affirms the objection decisions in respect of assessments of net amount for the tax periods ended 31 March 2015, 30 June 2015 and 30 September 2015 and the assessment of administrative penalty for the tax period ended 31 March 2018.

3.The Tribunal sets aside the objection decisions in respect of assessments of administrative penalty for the following tax periods, and substitutes decisions partly allowing the objections such that the assessed amounts are to be reduced to reflect partial remission of the penalties, as follows:

(a)    tax period ended 30 June 2015 – penalty to be remitted by $9,846.00;

(b)    tax period ended 30 September 2015 – penalty to be remitted by $20,973.00;

(c)    tax period ended April 2016 – penalty to be remitted by $39,796.00.

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

Senior Member R J Olding

CATCHWORDS

TAXATION – GOODS AND SERVICES TAX (GST) – attribution of input tax credits – discretion to treat document as tax invoice – failure to account for increasing adjustment – decisions affirmed

TAXATION – ADMINISTRATIVE PENALTIES – base penalty amount – increase in base penalty amount – remission of administrative penalty – relevance of taxpayer engaging accountants to prepare returns – relevance of conduct in other tax periods – where taxpayer overpaid in some tax periods and underpaid in others – relevance of taxpayer’s net position across the tax periods – decisions set aside – penalties partly remitted

LEGISLATION

A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 11-20, 19-70, 19-80, 29-

10,29-20(2), 29-70(1), 29-7(1B), 29-70(2)

Taxation Administration Act 1953 (Cth) s 14ZZK; Sch 1, ss 284-90, 284-220, 284-224, 298-

20

CASES

Archibald Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Commissioner of Taxation [2008] FCAFC 54

Bosanac v Commissioner of Taxation [2019] FCAFC 116

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

Hart v Commissioner of Taxation [2003] FCAFC 105; (2003) 131 FCR 203 Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24

Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634 Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50

SECONDARY MATERIALS

Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999 (Cth)

Practice Statement Law Administration PSLA 2012/5: Administration of the false or misleading statement penalty – where there is a shortfall amount

Practice Statement Law Administration PSLA 2004/11: Treating a document as a tax invoice or adjustment note

REASONS FOR DECISION

Senior Member R J Olding 26 February 2021

1.The Applicant, a property developer, is in dispute with the Commissioner of Taxation (“the Commissioner”), regarding a GST input tax credit (“ITC”) and increasing adjustment relating to construction services it acquired from a construction company (“Construction Co”) for a development project (“the Project”) and associated penalties relating to these and other issues.

THE DISPUTED ASSESSMENTS

2.The Commissioner’s audit covered tax periods from January 2015 to June 2016. The following table sets out the adjustments made by the Commissioner reflected in assessments of the Applicant’s net amounts and penalties for the tax periods under audit:

Tax Period	Net amount as lodged	Amended net amount	Commissioner’s adjustment to net amount	Shortfall penalty
1 Jan 2015 – 31 Mar 2015	($283,358.00)	($424,585.00)	($141,227.00)	-
1 Apr 2015 – 30 June 2015	($395,848.00)	($194,471.00)	$201.377.00	$100,688.50
1 July 2015 – 30 Sept 2015	($495,402.00)	($342,445.00)	$152,957.00	$91,774.20
1 Oct 2015 – 31 Dec 2015	($315,218.00)	($353,365.00)	($38,147.00)	-
1 Jan 2016 – 31 Mar 2016	($224,238.00)	($211,811.00)	$12,427.00	$7,456.20.00
1 Apr 2016 – 30 Apr 2016	($180,239.00)	$40,846.00	$221,085.00	$132,651.00.00
1 June 2016  – 30 June 2016	($194,300.00)	($228,475.00)	($34,175.00)	-
Total	($2,088,603.00)	($1,714,306.00)	$374,297.00	$332,569.90

3.The Applicant’s objection to the assessment of net amount for the tax period ending 31 March 2015 was allowed and ITCs were reduced by $102,919.00. An objection to the assessment of net amount for the tax period ended 30 June 2015 was partly allowed to the extent that ITCs were increased by the same amount. As these adjustments offset one another, they do not affect the total adjustments to net amount recorded in the final line of the table.

4.Although the table on the first page of the objection decision states that the objections to the penalty assessments were not allowed, the preceding section summarising the outcome of the objections to the primary tax assessments referred to in the previous paragraph states:

We will reduce your penalty for the tax shortfall amounts that have changed because of our decision.

5.Notices of assessment giving effect to the objection decisions were not produced to the Tribunal. However, I take the statement extracted in the previous paragraph to mean the penalty for the tax period ended 30 June 2015 would be reduced proportionately to the reduction in net amount caused by the increased allowance for ITCs in that period. That would have the effect of reducing the June 2015 penalty to $49,229.00 and is consistent with the parties’ conduct of the case on the premise that the penalty was 50% of the shortfall for this tax period.

6.The only tax periods before the Tribunal are those the subject of the Commissioner’s decisions on objection dated 20 April 2018, relating to assessments for the following tax periods:

(a)assessments of primary tax – 1 January to 31 March 2015; 1 April to 30 June 2015; and 1 April to 30 April 2016 (respectively the “March 2015; June 2015; and April 2016 primary tax assessments”);

(b)penalty assessments – 1 April to 30 June 2015; 1 July 2015 to September 2015; 1 January to 31 March 2016; and 1 April to 30 April 2016 (respectively the “June 2015; September 2015; March 2016; and April 2016 penalty assessments”).

7.The Applicant does not press its application for review in respect of the objection decisions relating to the March 2015 primary tax assessment or the March 2016 penalty assessment.1 With the Applicant’s consent, the Tribunal will affirm those objection decisions.

8.Thus, the contested objection decisions relate to assessments for these tax periods:

(a)primary tax - June 2015 and April 2016;

1 Transcript, 28 October 2020, page 4, lines 44-46; page 5, lines 1-4.

(b)penalties – June 2015, September 2015 and April 2016.

9.The objection to the June 2015 primary tax assessment concerns whether an ITC of

$98,458.08 for a single acquisition, but claimed by the Applicant in both the June 2015 and September 2015 tax periods, is attributed to the June 2015 tax period.

10.The objection to the April 2016 primary tax assessment concerns whether an increasing adjustment of $237,374.00 which was not brought to account by the Applicant at all, is attributed to the April 2016 tax period or, as the Applicant asserts, to the May 2016 tax period.

11.The objections to the penalty assessments are in respect of administrative penalties assessed by the Commissioner in relation to these alleged shortfalls and other alleged shortfalls in the September 2015 tax period, including another instance in which a substantial ITC, in the amount of $139,816.61, for a single acquisition was claimed twice in successive tax periods.

STATUTORY FRAMEWORK

Burden of proof

12.The Applicant has the burden of proving the assessments are excessive and what the assessments should have been: Taxation Administration Act 1953 (Cth) (“TAA”), s 14ZZK.

13.As the parties have confined the issues in dispute, the Applicant would discharge the burden of proof in respect of the primary tax assessments by proving the ITC and adjustment are properly attributed in the way it submits.

14.Determination of whether the Applicant has discharged the burden of proving the penalty assessments are excessive and, if so, what the assessments should have been, requires consideration of the base penalty amounts and increases in base penalty amount, if any, and whether any penalties so determined should be wholly or partly remitted.

Grounds of objection

15.Under s 14ZZK of the TAA, unless the Tribunal orders otherwise, in an application such as this for review of taxation objection decisions, the taxpayer is confined to the grounds in their notices of objection.

16.As discussed further below, an additional ground on which the Applicant seeks to rely, in respect of the June 2015 tax period, is that the Tribunal should exercise the discretion under s 29-70(1B) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“GST Act”) to treat a document as a tax invoice. The consequence would be that the relevant ITC would be attributed to the June 2015 tax period, leaving no shortfall and therefore no penalty for that tax period.

17.The Commissioner did not object to the Tribunal giving leave to extend the Applicant’s grounds of objection to include this ground. Being satisfied that it is appropriate to do so, I granted leave to the Applicant to rely upon this ground.

Input tax credits

18.Under the GST Act, the general rules for claiming ITCs include:

(a)an entity is entitled to an ITC for a creditable acquisition it makes;2

(b)where the entity accounts for GST other than on the cash basis, in other words on the basis commonly called the accruals basis, the ITC is attributed to the tax period in which the entity provides any consideration for the acquisition or an invoice (not necessarily a tax invoice) is issued if that occurs earlier;3

(c)however, if the entity does not hold a tax invoice when it lodges its GST return (known as an activity statement), the ITC is attributed to the first tax period for which the entity lodges a return when holding a tax invoice for the acquisition;4

2 GST Act, s 11-20.

3 GST Act, s 29-10(1).

4 GST Act, s 29-10(3).

(d)the supplier of a taxable supply must give the recipient a tax invoice within 28 days after the recipient requests it;5

(e)a tax invoice must contain specified information;6

(f)the Commissioner may treat as a tax invoice a document that would not otherwise be a tax invoice.7

Adjustments

19.The relevant rules under the GST Act for adjustments are:

(a)an entity has an “adjustment” if an “adjustment event” occurs and as a result a previously attributed ITC for an acquisition no longer correctly reflects the amount of the ITC on the acquisition;8

(b)an adjustment event includes “any event which has the effect of . . . changing the consideration for a supply or acquisition”;9

(c)if the previously attributed ITC is greater than the amount corrected for the adjustment event, the adjustment is an “increasing adjustment”, being the difference between the ITC claimed and the reduced amount reflecting the adjustment event;10

(d)for an entity accounting for GST on the accruals basis, an increasing adjustment is attributed to the tax period in which “you become aware of the adjustment”.11

Penalty provisions

20.The penalty regime under the TAA provides for an administrative penalty for a tax shortfall arising from a false or misleading statement in a document given to the Commissioner, such

5 GST Act, s 29-70(2).

6 GST Act, s 29-70(1).

7 GST Act, s 29-70(1B).

8 GST Act, s 19-70.

9 GST Act, s 19-10(1)(b).

10 GST Act, s 19-80.

11 GST Act, s 29-20(1).

as an activity statement, to be assessed by reference to the degree of culpability of the taxpayer.

21.However, there is no penalty if the taxpayer or their agent took reasonable care in making the statement.12

22.In determining the “base penalty amount”, lack of reasonable care, recklessness or intentional disregard of the law by the taxpayer or the taxpayer’s agent is relevant. Thus, a taxpayer who engages a registered tax agent to prepare its returns may still incur a penalty if, for instance, a tax shortfall arises because of recklessness by the tax agent.13

23.Under s 284-75(6) of Schedule 1 to the TAA, there is a statutory “safe harbour” which shields taxpayers from penalties if their tax agent fails to take reasonable care but only if the taxpayer provides all relevant information to the tax agent. The safe harbour does not apply if the tax agent’s culpability rises beyond lack of reasonable care to recklessness or intentional disregard of the law.

Meaning of “recklessness”

24.In respect of each of the contested penalty assessments, the Commissioner considers that a base penalty amount of 50% of the shortfall applies on the basis that the shortfall resulted from recklessness by the Applicant or its accountants as to the operation of the GST law.14

25.“Recklessness” as to the accuracy of a statement in a return has been explained in this way:

“Recklessness in this context means to include in a tax statement material upon which the [relevant tax laws] are to operate, knowing that there is a real, as opposed to fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true or correct, and that a reasonable person in the position of the statement-maker would see there is a real risk that the [relevant tax laws] 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”.15

12 TAA, Sch 1, s 284-75(5).

13 TAA, Sch 1, s 284-90(1).

14 TAA, Sch 1, s 284-90(1), item 2.

15 BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] FCA 164, [77]; (2001) 46 ATR 347, 364, cited

with approval in Hart v Commissioner of Taxation [2003] FCAFC 105; (2003) 131 FCR 203, [43].

Reduction in base penalty amount

26.Under s 284-224(1)(c) in Schedule 1 to the TAA, a base penalty amount is reduced to the extent that, relevantly for this matter, the taxpayer or their agent treated the tax law as applying in a particular way which agreed with a statement approved in writing by the Commissioner.

Increase in base penalty amount

27.Under s 284-220(1)(c) of Schedule 1 to the TAA, the base penalty amount calculated as indicated above is increased by 20% if a base penalty amount “previously” applied to the taxpayer. That has been held16 to mean the increase applies where there are successive shortfalls attracting penalties including where, as here, assessments of penalties for the successive periods were issued on the same date.

28.The base penalty amount may also be increased by 20% if the taxpayer “took steps to prevent or obstruct the Commissioner from finding out about the shortfall amount, or the false or misleading nature of a statement, in relation to which the base penalty amount was calculated”.17

Remission of penalties

29.The Commissioner, and the Tribunal standing in his shoes, may remit the whole or part of a penalty.18

30.The Full Federal Court has observed that the discretion to remit is broad and has held19 that the question for determination is simply whether the decision-maker is satisfied having regard to the taxpayer’s particular circumstances that it is appropriate to remit the penalty in whole or in part. For example, and without limiting the broad discretion under s 298-20, a decision-maker might determine that full or partial remission is appropriate because the outcome would be unreasonable or unjust having regard to the taxpayer’s particular circumstances.

16 Bosanac v Commissioner of Taxation [2019] FCAFC 116, [149].

17 TAA, Sch 1, s 284-220(1)(a).

18 TAA, Sch 1, s 298-20.

19 Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50; (2013) 212 FCR 483, [249].

31.In exercising the discretion, I must bear in mind the evident objects of the penalty regime to encourage appropriate care in the preparation of taxation returns and the consistent treatment of taxpayers making false or misleading statements according to their degree of culpability.

EVIDENCE

32.In addition to documentary evidence, the Tribunal was assisted by a project manager employed by a member of the corporate group to which the Applicant belongs (“the Project Manager”), who provided an affidavit and gave oral evidence. At all relevant times, the Project Manager was responsible for management of the contractual and financial affairs of the Applicant relating to the Project.

33.Additionally, the Tribunal was assisted by Mr Gerardo Incollingo who, as a director of the accounting firm LCI Partners Pty Ltd (“LCI”), was responsible for preparation of activity statements for the Applicant and other group companies. Mr Incollingo provided two affidavits, the second correcting an error in the first, and gave oral evidence. Mr Incollingo was assisted in his work for the Applicant by a staff member (“the LCI staff member”) who attended the Applicant’s premises and accessed its accounting system and records to prepare the activity statements. However, the LCI staff member, who is no longer employed by LCI, did not give evidence.20

34.Ms Deards, who appeared for the Commissioner, accepted that both witnesses gave their evidence truthfully, which aligns with my assessment of their evidence, and made no adverse submissions as to their credit.21

35.Ms Embeth Sadie, a solicitor employed by the Applicant’s solicitors, provided an affidavit exhibiting documents produced by Construction Co in response to a summons issued by the Tribunal at the request of the Applicant.

36.I turn now to determine whether the Applicant has discharged its burden of proof in respect of each of the contested primary tax and penalty assessments. In so doing, I have grouped

20 To the extent that there were shortcomings in the work carried out by LCI, to his credit Mr Incollingo took responsibility for the work and did not seek to lay blame at the feet of the staff member.

21 Transcript, 29 October 2020, page 173.

consideration of the primary tax assessments with their corresponding penalty assessments for the respective tax periods, where applicable.

JUNE 2015 – PRIMARY TAX

Facts

37.The issue in relation to this period concerns an ITC the Applicant claimed following receipt of a progress claim by Construction Co.

38.The relevant sequence of events is not in dispute:

(a)23 June 2015 – the Applicant received a progress claim styled Progress Application Number PC6 for $1,083,038.93 from Construction Co (“PC6”);

(b)30 June 2015 – the Applicant paid $984,580.86 to Construction Co on account of this progress claim PC6;

(c)6 July 2015 – the Applicant lodged its June 2015 activity statement, claiming an ITC of $98,458.08 relating to PC6;

(d)7 July 2015 – the Applicant received tax invoice number 504731 relating to PC6;

(e)16 July 2015 – the Applicant received from Construction Co a credit note for

$64,279.11 relating to PC6;

(f)4 November 2015 – the Applicant lodged its activity statement for September 2015 claiming an ITC of $92,614.53, being 1/11^th of the difference between the PC6 claim and the credit of $64,279.11, with the consequence that an ITC of $92,614.53 was claimed twice for a single acquisition.

39.The Applicant asks the Tribunal to exercise the discretion under s 29-70(1B) of the GST Act to treat PC6 as a tax invoice. If the Tribunal were to accept that submission and exercise the discretion, the ITC would be attributed to the June 2015 tax period. There would be no shortfall and the associated penalty would fall away.

40.The Applicant does not dispute that it claimed an ITC twice for one acquisition and that the ITC is not attributable to the June 2015 tax period unless the Tribunal exercises the

discretion under s 29-70(1B). Nor does the Applicant dispute that, if the Tribunal were to exercise the discretion, such that the ITC would be attributable to the June 2015 tax period and not the September 2015 tax period, the Commissioner would be out of time to amend the assessment for the September 2015 tax period. In other words, the consequence of the Tribunal exercising the discretion would be that the Applicant would retain the benefit of two ITCs, each in an amount of almost $100,000.00, for one acquisition.

41.The Commissioner accepts that the Applicant is entitled an ITC for the acquisition. However, the Commissioner resists the exercise of the discretion to treat PC6 as a tax invoice. Rather, the Commissioner says the ordinary application of the GST Act should be left undisturbed, so that the ITC is attributed to the September 2015 tax period.

Principles relating to the discretion under s 29-70(1B)

42.The discretion under s 29-70(1B) is broad and unconfined by any express requirement to take into account or not take into account any particular considerations. Thus, it requires a decision to be made upon consideration of circumstances that are relevant to the request for exercise of the discretion.

43.Because s 29-70(1B) is silent as to the considerations which may or must inform the exercise of the discretion, the factors to be considered by the decision-maker must be discerned from the subject matter, scope and purpose of the legislation as determined by permissible means.22 Mr Peadon, who appeared for the Applicant, submitted that s 29-70(2) assists in that regard.

44.That provision, it will be recalled, requires a supplier of a taxable supply to provide a tax invoice within 28 days after the recipient of the supply requests it. As Mr Peadon put it, s 29-70(2) operates satisfactorily where the acquisition and request for a tax invoice are able to be made within a time that ensures the obligation to provide a tax invoice arises before the recipient’s return is lodged. However, in this case the Applicant could not obtain the benefit of s 29-70(2) because the 28-day period would not have expired when its return was lodged and it would be denied the benefit of claiming the ITC even though it had all the information contained in a tax invoice and had largely paid the consideration.

22 Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24.

45.Against that context, Mr Peadon submitted:

Not to be able to claim the benefit of the input tax credits, simply because despite parliament trying to assist purchasers by subsection [29-70(2)], they don’t fall within it. And it’s quite clearly why, in my submission, it’s one of the reasons subsection [29-70(1B)] is there.23

46.I accept that s 29-70(2) evidences an intention to facilitate taxpayers claiming ITCs to which they would otherwise be entitled. That might be thought to be consistent with s 29-70(1B) having a similar object. I am, though, respectfully unable to see how that significantly advances understanding of the factors to be considered in determining whether to exercise the discretion. The beneficial object of s 29-70(1B) is self-evident from its terms.

47.The submission seems to suggest the circumstance that the 28-day period for a tax invoice to be provided has not expired when the taxpayer lodges its activity statement supports a favourable exercise of the discretion. In my view, that would be to draw rather too much from the legislative context of s 29-70(1B). In a practical sense, absent any contrary indicators, it would amount to almost a blanket exception to the requirement to hold a tax invoice in any case where a tax invoice had been requested but not received. I do not say this circumstance is irrelevant, but nor would I give it substantial weight in determining whether to exercise the discretion.

48.My attention was drawn to the following passage in the Explanatory Memorandum to the Bill for the amending Act that inserted s 29-70(1B):24

1.44 There may be situations where you hold a document that strictly does not meet the information requirements for tax invoices or adjustment notes prescribed by the GST Act, the regulations and the applicable form (if any) approved by the Commissioner. In those situations the requirement to hold a tax invoice or adjustment note may impose a disproportionate burden on you, particularly if you hold a document that substantially complies with the requirements and the entitlement to an input tax credit or decreasing adjustment is otherwise verified.

1.45   The Commissioner is to be given the discretion to treat, as a tax invoice or adjustment note, a document held in such situations.

49.I do not find this paragraph particularly helpful in the current context. I accept Mr Peadon’s submission that one should not substitute for the broad discretion under s 29-70(1B) a test

23 Transcript, 28 October 2020, page 19, lines 6-9.

24 Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999

(Cth).

of whether a “disproportionate burden” would otherwise be imposed. It may be that a favourable exercise of the discretion would commonly be warranted in such circumstances, but it is not a statutory requirement that the decision-maker identify a disproportionate burden the taxpayer would otherwise bear as a prerequisite for the exercise of the discretion. Ms Deards made clear that the Commissioner did not submit otherwise.

50.The Commissioner has published a policy document setting out factors for his staff to consider when determining whether to exercise the discretion: Practice Statement Law Administration PSLA 2004/11: Treating a document as a tax invoice or adjustment note (“PSLA 2004/11”). In considering PSLA 2004/11, I take the applicable principle to be that I may and should take it into account, but it cannot dictate my conclusion which must be determined by reference to the particular case and having regard to all relevant considerations.25

51.Factors for consideration identified in PSLA 2004/11 include the recipient’s behaviour (including whether the recipient mistakenly believed a document held was a tax invoice or was aware they did not hold a tax invoice but claimed the ITC anyway) and the recipient’s knowledge and experience (including the recipient’s compliance history and record- keeping; whether the absence of a tax invoice was a one-off or recurring issue; and whether the recipient is a new small entrant or an established or larger enterprise).

Should the discretion under s 29-70(1B) be exercised in the Applicant’s favour?

52.This is not a case where the Applicant would, but for an exercise of the discretion, be denied the benefit of an ITC which would have been attributed to a tax period if it held a tax invoice. The Commissioner does not seek to deny the Applicant the benefit of the ITC, but merely maintains it should be attributed, as the Act requires absent the exercise of the discretion, to the September 2015 tax period.

53.In those circumstances, the factors listed in PSLA 2004/11 summarised above have less significance. I have found them to be of little assistance in the current context.

25 Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634.

54.The Applicant points to the fact that it had “paid most of the consideration” for the acquisition and received the progress claim, but received the tax invoice “one day too late” – that is, one day after it lodged the activity statement claiming the ITC.26 I do not find these factors compelling. The question of attribution of an ITC would not arise at all in the absence of an invoice or part payment. That the Applicant had paid “most of the consideration” although not irrelevant does not seem to me to provide a compelling reason to exercise the discretion. In respect of the Applicant lodging the activity statement one day before it received the tax invoice, I make two observations.

55.First, it was the Applicant’s choice to lodge the activity statement when it did. It was not compelled by statute to do so; the due date for lodgement had not arrived when the Applicant lodged the statement.

56.Secondly, that the tax invoice was received “one day too late” – or, more accurately, the activity statement claiming the ITC was lodged one day too early if it was to include the ITC

– is not, in my view, an irrelevant consideration. However, I would give it limited weight. The legislation draws a line in the sand – a tax invoice for a creditable acquisition must be held when an activity statement claiming the ITC is lodged. If not, the ITC is attributed to the next tax period in which a tax invoice is held. Whether the tax invoice is received a day, a week or a month later does not change that requirement and does not, in my view, provide a reason to which I should give substantial weight in determining whether to exercise the discretion.

57.In short, I do not accept the Applicant’s submission that these factors justify a conclusion that requiring the Applicant to hold a tax invoice before claiming the ITC imposes a disproportionate burden or otherwise calls for a favourable exercise of the discretion. The burden of delaying a claim for an ITC until a tax invoice is held falls upon every GST taxpayer and is not, in my view, disproportionate in the circumstances of this matter. The Applicant is not denied an ITC on this view. It is entitled to, and has obtained, the benefit of, the ITC in the September 2015 tax period.

26 Applicant’s Outline of Submissions filed 16 September 2020.

58.The Commissioner did not seek to place significant reliance on the fact that the Applicant would effectively enjoy the benefit of a double claim for an ITC for a single acquisition if the discretion were to be exercised in its favour, since he is out of time to amend the assessment for the September 2015 tax period. Although I would reach the same view without taking this factor into account, for my part I do not consider it to be insignificant. In my view, it would be quite contrary to its evident purpose for the discretion to be exercised in circumstances where that course is not only unnecessary to facilitate a taxpayer obtaining the benefit of an ITC to which it would otherwise be entitled, but would result in the obtaining of a substantial unintended benefit.

59.Mr Peadon sought to discount this “double-dipping” issue in two ways. First, Mr Peadon pointed out, as I accept, that the Applicant did not set out to double dip. The Commissioner did not submit otherwise. Secondly, Mr Peadon sought to lay the blame for the circumstance that the Commissioner is now out of time to re-assess the September 2015 period at the feet of the Commissioner. Mr Peadon submitted that upon being made aware in the Applicant’s Statement of Facts Issues and Contentions that the Applicant would be seeking an exercise of the discretion by the Tribunal the Commissioner could have taken the “prophylactic” step of issuing an alternative assessment of the Applicant’s net amount for the September 2015 tax period excluding the ITC. With respect to the submission, I would not be critical of the Commissioner for not pre-emptively issuing such an assessment which, absent a favourable exercise of the discretion by the Tribunal, on any view would not accurately reflect the Applicant’s net amount for the September tax period. I do not regard this submission as detracting from what I have said regarding the significance of the double- dipping, but as noted, I would reach the same conclusion whether or not I give weight to the double-dipping in determining whether to exercise the discretion.

Conclusion – exercise of the discretion is not the preferable decision

60.For these reasons, I am not persuaded that an exercise of the discretion is appropriate. It follows that the Applicant has not discharged the burden of proving the June 2015 primary tax assessment is excessive and the objection decision in respect of this assessment must be affirmed.

JUNE 2015 - PENALTY ASSESSMENT

61.The penalty for this period is in the amount of $49,229.00, being a base penalty calculated at the rate of 50% of the shortfall for recklessness.

62.This penalty relates solely to the shortfall arising out of the incorrect claiming of the ITC in the Applicant’s activity statement for the June 2015 tax period instead of in the return for the September 2015 tax period to which it was properly attributed.

Base penalty amount?

63.The Applicant submits that it cannot be said to have been reckless in claiming the ITC where it had made the acquisition; received the progress claim relating to the services acquired; and paid most of the consideration. Indeed, it says notwithstanding that it double claimed a substantial ITC, its culpability does not even rise to the level of lack of reasonable care when its conduct is considered in context.

64.On the other hand, the Commissioner points to the absence in the evidence of any real explanation for the claiming of the ITC in this period. While there is contextual evidence from which one might speculate, there is no direct evidence of why the ITC came to be claimed without the Applicant holding a tax invoice. The LCI staff member who might have been able to shed light on this, for example by reference to a contemporaneous file note, was not called to give evidence.

65.In the absence of contrary evidence and since the Applicant engaged LCI to prepare its activity statements, I infer that the Applicant or its agent, LCI, were aware of the requirement for a tax invoice. Further, in the absence of contrary evidence, I cannot be satisfied the Applicant or its agent, LCI, were not aware that no tax invoice was held when the activity statement claiming the ITC was lodged.

66.The Commissioner also points to what he describes as an inadequate accounting system that allowed double counting and a number of other significant errors over the period of the audit to occur. It may be debatable whether it is appropriate for me to consider later conduct

– the operation of the allegedly inadequate accounting system in later periods – in determining whether the Applicant and/or LCI relevantly failed to exercise reasonable care or were reckless in respect of the June 2015 activity statement. However, for the reasons

that follow it is not necessary for me to resolve this issue for the purpose of determining the level of base penalty for this period.

67.One reason is that the circumstance that I would take into account is not the subsequent performance of the accounting system but rather the failure to put in place an adequate system (by which I mean both the accounting system itself and accompanying authorisations and procedures including, so far as the evidence indicates, procedures for reconciling the progress claims with the corresponding ITCs claimed, as one might have expected in the context of multiple progress claims and variations). That failure, which I infer from the multiple significant errors over multiple periods revealed by the outcome of the audit and the absence of contrary evidence, predates but continued at least until lodgement of the activity statement for this (and other) tax periods subject to the audit.

68.More fundamentally, though, as already noted, the Applicant bears the burden of proving that the assessment is excessive. In the absence of evidence explaining the circumstances that led to the wrongful claim of this substantial ITC in this period as well as in the following period, there is in my view insufficient evidentiary foundation on which I could determine that the 50% base penalty is excessive. The circumstances in which the ITC was claimed without a tax invoice might conceivably range from a mere oversight to reckless indifference to whether a tax invoice was held. While I might speculate, I simply do not know, nor is there sufficient evidence from which on balance I might accept, how the ITC came to be claimed without a tax invoice being held.

69.Accordingly, and on balance, I am not satisfied the base penalty of 50% is excessive.

Reduction in base penalty amount?

70.As noted, under s 284-224(1)(c) in Schedule 1 to the TAA a base penalty amount is reduced to the extent it is caused by the taxpayer applying the tax law consistently with a statement in an Australian Taxation Office (“ATO”) publication.

71.The Applicant says it is entitled to this protection because its claiming of the ITC without a tax invoice accorded with the Commissioner’s Practice Statement PSLA 2004/11, which is concerned with when ATO officers should exercise the discretion to treat a document as a tax invoice, as it stood at the relevant time. In particular, the Applicant drew attention to paragraph 2 of PSLA 2004/11 in these terms:

2. When an exercise of the discretion is not required

An ITC can be claimed without a valid tax invoice if:

. . .

the recipient has asked the supplier to provide a valid tax invoice but 28 days has not expired since the request was made

. . .

72.The Commissioner’s submissions proceed on the apparent premise that this extract reflects the wording of PSLA 2004/11 at the relevant time but assert that on a proper construction of the emails to which the Applicant refers it did not request a tax invoice for PC6. However, after reviewing PSLA 2004/11 on the ATO’s website in the course of preparing these reasons it is not clear to me that PSLA 2004/11 was in fact worded in this way when the Applicant lodged its activity statement on 6 July 2015.

73.Reference to historical versions on PSLA 2004/11 accessible on the ATO website27 indicates that the extracted wording first appeared in the version of PSLA 2004/11 published on 5 August 2015. The most proximate earlier version is listed as published on 20 April 2015. That version deals with the circumstance of a tax invoice having been requested but not received when an activity statement is lodged in these terms:

When discretion is not necessary

26. In some circumstances it might not be necessary for ATO personnel to consider the exercise of the discretion. This may be the case, for example, if:

. . .

the recipient has also made a request to the supplier to issue a valid tax invoice, and the 28 day period that the supplier has to provide a tax invoice has not expired.

74.This seems to indicate that an exercise of the discretion may not be necessary where a request for a tax invoice has been made but the 28 days for compliance with the request has not expired. Not surprisingly, an exercise of the discretion may not be required in those circumstances because the supplier may well comply with the request. Notably, however, this version of PSLA 2004/11 does not include the statement contained in the 5 August 2015 version that “an ITC can be claimed without a valid tax invoice” when the taxpayer has

27 PS LA 2004/11 | Legal database (ato.gov.au).

requested the supplier provide a tax invoice but it has not been received when the activity statement is lodged.28

75.If, as appears to be the case, the 20 April 2015 version was current when the Applicant lodged its activity statement, I cannot see any basis on which s 284-224(1)(c) could be engaged. The corresponding statement that an exercise of the discretion may not be required could not reasonably be construed as authorising the claiming of an ITC without either a valid tax invoice or a favourable exercise of the discretion.

76.I considered whether to check my understanding of the sequence of versions of PSLA 2004/11 with the parties. However, that would have further delayed finalising the review. I decided that it was not necessary to do so because, even if I am mistaken in this understanding, and the version extracted by the Applicant was current at the relevant time, I would nevertheless conclude that s 284-224(1)(c) is not engaged. That is because, upon examining the email said to constitute the request for a tax invoice in its context, I am not persuaded that any such request was made in respect of PC6 before the June 2015 activity statement was lodged.

77.The relevant chain of emails starts with an email dated 2 July 2015 from Construction Co to the Applicant relating to a payment in the amount of $984,580.86 received by Construction Co from the Applicant being the PC6 claim less the GST on that amount, and asks that the Project Manager “call to discuss”.29 The Project Manager replied on 2 July 2015, opening his email with “As discussed” and going on to say “Will review the amount of “… $984,580.86 with you”.30 Later that day, Construction Co replied:

As requested. I need to work out the invoice for Claim 6 today. Will be back with you shortly.31

78.I am not satisfied the opening words “As requested” acknowledge a request for a tax invoice for PC6. They are more readily explicable as referring to the Statement of Account attached to the email. It is true that the 2 July 2015 email notes that the Applicant “does not have”

28 The legal foundation for the statement in the 5 August 2015 version of PLSA 2004/11 is not apparent to me. It does not appear in the current version published on 3 September 2020.

29 Applicant’s Hearing Bundle, Volume 5, page 3413.

30 Ibid.

31 Ibid.

certain tax invoices requested earlier. That could certainly be construed as a further request for those tax invoices. However, the references to previous requests do not relate to PC6. It is, in my view, too much of a stretch to construe that apparent follow up of previous requests as implicitly making a new request for the tax invoice for PC6.

79.Accordingly, I am not persuaded that the base penalty is reduced under s 284-224(1)(c).

Should the penalty be remitted?

Practice Statement Law Administration PSLA 2012/5

80.Practice Statement Law Administration PSLA 2012/5: Administration of the false or misleading statement penalty – where there is a shortfall amount provides guidance to ATO officers on the exercise of the discretion to remit penalties. I am not bound by it but may take PSLA 2012/5 into account and it is desirable that I do so in the interests of consistency in administrative decision-making.

81.The Applicant relies on these passages in PSLA 2012/5:

17G. We have the discretion to treat a document as a tax invoice or adjustment note, despite it not meeting the requirements to be a tax invoice or adjustment note. Where we accept that a creditable acquisition or decreasing adjustment has been made, but do not exercise the discretion, a shortfall amount may arise.

17H. In these instances, you should usually remit any shortfall penalty in full unless it is clear the recipient

·  was aware of the requirements in relation to holding a valid tax invoice or adjustment note before it could attribute its claim, and

·  deliberately sought to gain an advantage by making the claim without holding a tax invoice or adjustment note.

82.The Commissioner accepts that the exception referred to at the end of this extract does not apply because he accepts that the Applicant did not deliberately seek to obtain an advantage by claiming the ITC. However, the Commissioner says this is not the “usual” case as it involves double counting.

83.I agree with this proposition. It may be accepted that the discretion to remit a penalty should usually be exercised where a taxpayer would otherwise be entitled to the benefit of an ITC but for a refusal, for whatever reason, to exercise the discretion to treat a document as a

tax invoice. This remission guideline is premised upon the taxpayer otherwise being entitled to the ITC in the period in which it was claimed and avoids the injustice that would arise from imposing a penalty. Here, the Applicant was entitled to and obtained the benefit of the ITC in the September 2015. It was not entitled to the ITC in the June 2015 tax period and yet it claimed that ITC in both that and the subsequent period and offers no real explanation for doing so.

84.In my view, it is not appropriate to remit the penalty wholly or partly in reliance on the extracted part of PSLA 2012/5 in the particular circumstances of this matter.

Relevance of the Applicant engaging accountants

85.On one view, it might be asked: Why should the Applicant suffer a penalty when it engaged, I infer at considerable expense, professional accountants to prepare its activity statements? What more could a taxpayer reasonably do to ensure proper compliance with its obligations?

86.As already noted, it is clear that the fact that a taxpayer engages professional assistance does not in itself protect it from a base penalty if a shortfall arises from the lack of reasonable care or recklessness of the accountants, as such culpability is assessed by reference to the conduct of the taxpayer or their agent. It is only where the taxpayer has provided all relevant information to the agent, and only then if the agent’s conduct does not descend to the level of recklessness or intentional disregard of the law, that the taxpayer enjoys protection from assessment of a base penalty amount.

87.However, the discretion to remit is conferred in broad and unfettered terms. I may consider any relevant circumstances unless, having regard to subject matter, scope and purpose of the legislation, it is impermissible to have regard to a particular circumstance.32

88.As is evident in the terms of the legislation, the policy of the penalty regime is that engaging accountants to prepare an activity statement does not in itself deliver protection from penalties. Such protection is provided subject to the limitations of the “safe harbour” provisions (which are not engaged in this case – see the final paragraph below). In those

32 Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24.

circumstances, a question arises in my mind as to whether it is appropriate for the decision- maker to take into account, in the context of consideration of remission, the fact that the taxpayer has engaged accountants to prepare its returns. To remit penalties for that reason, at least if the remission were substantial, might be seen to be contrary to the underlying object of the penalty provisions to encourage proper care in complying with taxation obligations by taxpayers and their agents.

89.In Archibald Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Commissioner of Taxation,33 intervention by the Commissioner denied an incorrect claim for an ITC before it was released to the taxpayer. Thus, it was said that “no harm was done”. However, the Full Federal Court held that it would be an error to take into account, for the purposes of remission of penalty, that the Commissioner detected the error before the ITC was released to the taxpayer.

90.In arriving at this conclusion, the Court referred to two aspects of the legislative context as indicating that the fact that no harm was done is not a permissible consideration. First, the penalty provisions provide specifically for reductions in penalty if the taxpayer voluntarily discloses a shortfall but does not make any allowance for the possibility of the Commissioner detecting a shortfall before any harm is done. Secondly, the Court referred to the imposition of the general interest charge where the taxpayer has had the benefit of a shortfall.34

91.By (admittedly broad and imperfect) analogy, it might be said that the specific reference to conduct of a taxpayer’s agent, and specific but conditional provision of a safe harbour for taxpayers relying on an agent, are inconsistent with taking into account for remission purposes the fact that a taxpayer has engaged accountants to prepare their activity statements.

92.I raised this issue with Ms Deards in the course of the hearing. Ms Deards did not take the position that the engagement of accountants is an irrelevant consideration which it would be an error of law to take into account in deciding whether to remit the penalty wholly or

33 [2008] FCAFC 54.

34 [2008] FCAFC 54, [21]-[25].

partly. Neither counsel directed my attention to any case in which this issue had been confronted directly.

93.Ms Deards’ response is consistent with the Commissioner’s views in PSLA 2012/5:

Where the actions of the tax agent are more culpable than the entity's actions

17J. Sometimes an agent's behaviour is more culpable than the entity's. This can result in an unjust result.

17K. For example an unjust result may also occur in certain situations where the entity has made a genuine attempt to comply (they have taken reasonable care), but because of the actions of their tax agent the entity is liable to a penalty and safe harbour does not apply (for example, because the agent was reckless in their application of the law).

17L. As an entity is responsible for the actions of their agent, except where safe harbour applies, it would be unusual full remission to be given unless the taxpayer took reasonable care.

17M. An entity does not give up responsibility simply by appointing a tax agent. They are still required to ask questions or make reasonable enquiries, commensurate to their knowledge and experience, with the tax agent about the reporting that is occurring. Additionally, they are liable for the penalty outcomes of actions of their agent unless safe harbour applies.

17N. Where the entity failed to take reasonable care some remission may still be appropriate. However, in the absence of exceptional circumstances, remission (if any) on this basis should not be below the level of behaviour exhibited by the entity unless other circumstances apply.

94.With some hesitation but having regard to Ms Deard’s response to my query and the Commissioner’s guidance to his officers in PSLA 2012/5, I do not eschew altogether taking into account for remission purposes the fact that the Applicant engaged accountants to prepare its activity statements. However, I am mindful of considering that laudable approach in the context in which the error leading to the incorrect claiming of the ITC occurred and the legislative provisions directly addressing the culpability of agents.

95.The evidence indicates that the LCI staff member was embedded at the Applicant’s premises for around two days per week. That indicates a substantial commitment by the Applicant to getting its activity statements right, although that has to be judged against the background that the Applicant forms part of a larger group and preparation of the Applicant’s activity statements for its substantial project was but one of the responsibilities of the LCI staff member.

96.Additionally, Mr Incollingo’s evidence establishes that LCI’s checks were generally limited to following up exception reporting generated by the Applicant’s accounting system. Source documents “would only be checked if a GST Audit is requested by the ATO”.35 There is no evidence of sample checks or other checking carried out by LCI or by the Applicant. Ultimately, the error has as its source the incorrect entry of the acquisition into the Applicant’s accounting system in a way that generated an ITC to which it was not entitled in the GST report for the tax period.

97.I will return to consideration of this factor when weighing up all of the circumstances relevant to the remission issue.

A series of errors

The accounting system

98.As already indicated in the context of determining the base penalty amount, the Commissioner sought to rely on the Applicant having an inadequate accounting system and procedures which gave rise to multiple serious errors over a number of tax periods. That is evident from the adjustments to the activity statements for the periods covered by the audit set out in the table at paragraph 2 above and from the specific errors that are discussed in these reasons.

99.To the extent that it involves conduct subsequent to lodgement of the activity statement, it may be doubtful whether that consideration could be relevant in determining the base penalty amount. However, for the reasons that follow, I consider I am not precluded from consideration of the flaws in the accounting system and procedures in part revealed by later errors in the context of remission.

100.In the same way that, in a proper case, a decision-maker might take into account that an error was of an isolated nature – which may necessarily involve a finding about tax periods other than the particular period under consideration – that an error was not isolated but one of multiple significant errors is, in my view, relevant context.

35 Affidavit of Gerardo Incollingo dated 7 June 2019, paragraph 8.

101.However, even if I am wrong in that view, there are particular circumstances in this case that in my view make reference to flaws in the accounting system and procedures permissible. First, some of the errors occurred in the period before the tax periods under review. Secondly, and more importantly, the circumstance that I would take into account is not the subsequent errors but rather, as noted in the discussion of the base penalty amount above, the failure to put in place an adequate accounting system and procedures. That failure predates the lodgement of the activity statements and on that view must be a factor relevant to the assessment or remission of penalties, as it goes to the effort taken to achieve compliance with the tax law.

The Applicant’s “net” position

102.Mr Peadon referred to the table at paragraph 2 above which indicates the Applicant overpaid in some tax periods and underpaid in others resulting in a net underpayment (after deducting overpayments) across the tax periods under review of $374,297.00 and penalties in the aggregate of $332,569.90. As Mr Peadon pointed out, the aggregate amount of those penalties assessed expressed as a percentage of the net underpayment is approximately 89%.

103.However, Mr Peadon’s submission that the Applicant would suffer an effective penalty rate of around 90% somewhat overstates the position following the objection decision reducing the penalty assessment to $49,229.00 consequent upon the increased allowance for ITCs for the June 2015 tax period. There was no corresponding increase in penalty following the reduction in the ITCs allowed in the previous tax period as the Applicant did not have a shortfall for that period. Once the reduction in penalty for the June 2015 tax period, which reduces the aggregate of the penalties to $281,081.00, is taken into account, the effective penalty rate across the tax periods under audit is approximately 75%.

104.While not as severe as Mr Peadon’s submission suggested, nevertheless an effective penalty rate of that order would approximate the base penalty imposed for intentional disregard of the law. I consider that would be an unduly harsh and inappropriate outcome in the circumstances. I can identify nothing in the subject matter, scope and purpose of the penalty regime that would make it inappropriate for me to take this into account in deciding whether to remit penalties.

Conclusion on remission - June 2015 penalty assessment

105.The taxpayer’s failure to put in place an adequate accounting system and procedures, which has resulted in multiple significant errors over multiple tax periods including the substantial ITC claimed bin this period as well as the next, is, in my view, a powerful indicator against remission of penalties. Substantial remission in those circumstances would be inimical to the objects of penalty regime.

106.However, for the reasons already indicated, I take into account the Applicant’s effort to achieve compliance by engaging accountants to prepare its activity statements. The weight which I give to this factor is, though, limited. It would not be appropriate against the background of the penalty regime’s treatment of the culpability of taxpayer’s agents and the Applicant’s own responsibility for putting in place an effective accounting system and procedures for penalty to be substantially remitted on the basis of this consideration.

107.For the reasons already given, I consider that an overall effective penalty rate, after taking into account overpayments, of 75% of the shortfalls net of overpayments, is unduly harsh in the circumstances. The penalty for this period is attended by that harshness.

108.Having regard to these factors and the issues discussed above, I conclude that the penalty for this tax period should be remitted by 20% or $9,846.00. This results in a penalty of 40% of the shortfall for this period, the penalty after remission being $39,383.00.

109.This limited remission takes into account the harshness identified earlier where the Applicant also underpaid significantly in some periods and makes a modest allowance for the Applicant attempting to comply with its obligations by engaging accountants. It also takes into account, to a limited extent, the confusing nature of some of the documentation referred to in the evidence of Mr Incollingo which I infer would have contributed to the error, but also the Applicant’s less than total co-operation with the Commissioner as evidenced by a degree of tardiness in providing full and accurate information regarding its accounting for GST and the underlying transactions.36 It leaves the aggregate penalty for the audit

36 Such as failure to respond to formal information demands in a timely manner, resulting in a threat of prosecution: Supplementary T documents ST12-757, ST13-764, ST14-765, ST15-774, ST16-775.

period as approximately 56% of the total of the net underpayments, as set out in the Appendix to these reasons.

110.In my view, this strikes the correct balance – a substantial penalty by any measure but without the undue harshness attended by the penalty remaining after the objection decision. In the absence of more direct evidence of the circumstances leading to the incorrect claiming of the ITC, I consider there is no evidentiary foundation upon which I could allow any further remission.

111.The objection decision in respect of the June 2015 penalty assessment will therefore be set aside and substituted with a decision allowing the objection in part such that the penalty is remitted by $9,846.00.

SEPTEMBER 2015 - PENALTY ASSESSMENT

112.This penalty assessment is in the amount of $91,774.20 calculated at the rate of 50% for recklessness increased by 20%.

113.The shortfall by reference to which this penalty was calculated relates mainly to another instance in which the Applicant claimed an ITC twice – in this case in the amount of

$139,816.61 – for the same creditable acquisition.

114.Additionally, the shortfall for this period includes an amount of $13,140.30 comprising an increasing adjustment the Applicant failed to bring to account in its activity statement for the September 2015 tax period (or in any other activity statement).

Procedural fairness issue

115.The Commissioner referred to the increasing adjustment of $13,140.30 mentioned in the previous paragraph in his written opening submissions. The issue was not raised in the Applicant’s or the Respondent’s Amended Statements of Fact Issues and Contentions.

116.The Applicant in its written reply submissions stated that this issue had not previously been raised by the Commissioner and as a matter of procedural fairness he should not now be permitted to do so and maintained that position at the hearing. In particular, the Applicant stated:

8.  Prior to receipt of the RS [Respondent’s opening submissions], the parties dispute as to the shortfall penalty for the tax period ended 30 September 2015 has been confined to two sources of the shortfall for that tax period. As set out(sic) more detail in AS [25]–[28], in this period the Applicant claimed input tax credits in respect of two acquisitions when it had already claimed those input tax credits in the prior tax period. It was those two acquisitions that were identified as being in issue for this tax period in the Applicant’s Amended Statement of Facts, Issues and Contentions at [8]–[9], [26]-[27]. In his Amended State of Facts, Issues and Contentions, the Commissioner similarly identified those two acquisitions as being the acquisitions in issue for this period (at [31]-[39], [66]-[67].

9. Now, in RS [35] the Commissioner refers to an additional negative “tax invoice” which presumably he says gives rise to an adjustment attributable to this tax period. By the Commissioner only seeking to raise this as an issue in his written submissions, the Applicant is denied an opportunity to meet this issue with evidence. That evidence could have gone to whether and/or when the Applicant received this negative “tax invoice”, which would determine when the Applicant became aware of any adjustment and hence would determine to which tax period any adjustment was attributable (s 29-20(1) of the GST Act).

117.Although the primary tax assessment for the September 2015 tax period is not before the Tribunal, it appears the Applicant is saying that, if it had been aware of this issue, it would have sought to challenge that part of the penalty that is referable to the shortfall arising from the failure to bring this adjustment to account by seeking to establish that it was not liable for the adjustment in this period. On that basis, the shortfall against which assessment and remission of penalty should be considered would be correspondingly reduced. It was, it says, denied that opportunity because the Commissioner only raised the issue in his written opening submissions.

118.The difficulty with this submission is that the Commissioner did not raise this adjustment for the first time in his written opening submissions. The Applicant’s failure to bring this adjustment to account was raised in the Commissioner’s Reasons for Decision dated 16 May 2017 detailing the outcome of his audit. It was included in Attachment D to those Reasons, which is a schedule of the Commissioner’s amendments to the Applicant’s activity statement.

119.In the notice objecting to the assessments, in respect of the September 2015 tax period the Applicant’s accountants specifically stated:

The tax payer (sic) agrees with the ATO position at Attachment D.

120.In those circumstances, it should not be surprising that the Commissioner did not consider the Applicant’s liability for the adjustment to be in issue and especially so since it was not raised in the Applicant’s Amended Statement of Facts, Issues and Contentions.

121.In the circumstances, I respectfully reject the submission that the Commissioner’s conduct has resulted in the Applicant being denied procedural fairness. The Applicant was entitled to put on evidence and make submissions relating to the whole of the assessment. That it failed to do so results from its own forensic choice or oversight. It is not the Commissioner’s responsibility to put in issue a matter the Applicant had not, and that the Applicant had earlier expressly and specifically accepted.

122.Mr Peadon did not suggest that the hearing should be adjourned to allow time for further evidence to be adduced in relation to this issue. Rather, it is implicit in the submission that the Commissioner should not be permitted to raise the issue that the Tribunal should accept the assessment is, at least to the extent referable to this issue, excessive. In the absence of the Commissioner or the Tribunal confining the issues in a way that accepted no penalty could apply to the extent of this issue, there is no basis on which such a finding could be made. The Applicant has the burden of proving the assessment is excessive and neither the Commissioner nor the Tribunal has confined the issues in dispute in respect of this assessment.

Base penalty amount?

123.As the Applicant adduced no evidence and made no submissions in relation the (relatively speaking) minor component of the penalty referred to in the previous section, there is no basis upon which the Tribunal could conclude the Applicant has discharged the burden of proving that part of the assessment is excessive.

124.In relation to the major part of the assessment – relating to another double-claimed ITC – the Applicant makes a number of submissions.

125.The Applicant says that because there were other errors it made to its disadvantage this indicates that the Applicant was not engaged in any dishonest practice but simply made genuine errors. So much may be accepted – the Commissioner does not suggest otherwise

– but I do not see how this significantly advances consideration of whether the Applicant

exercised reasonable care or was reckless. Dishonesty is not an element of either characterisation.

126.The evidence of Mr Incollingo as to the cause of the incorrect, double claim is ultimately speculative. Indeed, several explanations have been given by the Applicant over the course of the proceedings. Mr Incollingo cannot actually say why the error occurred as it was the LCI staff member, not Mr Incollingo, who made the entry into the accounting system.

127.The Applicant says that Construction Co’s statement was objectively misleading and, since it is not suggested that the staff member acted dishonestly, it should be inferred that he was misled by the documentation. However, this begs a number of unanswered questions.

128.Was the ITC in fact entered from Construction Co’s statement? If so, why did that occur rather than the entry being entered from the relevant invoice? Was there no system for authorising or checking the validity of significant entries that involved checking against source documents? I accept that the Applicant is part of a large group and this project was itself of significant size. Even in that context, though, an acquisition for in excess of

$1,000,000 is not insignificant and nor is the ITC it would generate.

129.The Applicant also points to Mr Incollingo’s evidence that LCI transitioned its clients, including the Applicant, from the MYOB accounting system to the Xero accounting system from 1 July 2015 and that both of those systems included mechanisms to flag potential double counting. However, since the first claim was entered into the MYOB system in the June 2015 period and the second in Xero in the September 2015 period, these checks which might otherwise have highlighted the double counting were not effective. The Commissioner’s response is that an appropriate accounting system would have procedures in place to prevent such errors in the transition.

130.What I am left with is this:

(a)The Applicant wrongly claimed an ITC in the amount of $139,816.61 in its September 2015 activity statement, which it had already claimed in the activity statement for the June 2015 tax period.

(b)This was not the only error in the activity statement.

(c)Although the change in computer system meant that double entries straddling the two systems were not flagged, LCI did not put in place any process to avoid double counting in the transition to Xero.

(d)It was not the first time the taxpayer had made significant errors in its activity statements. There were significant errors in the previous two statements. For the reasons previously given, I infer that the Applicant failed to put in place an adequate accounting system and procedures.

(e)The Applicant offered various, and to an extent inconsistent, speculation, but did not adduce direct evidence of why the error occurred. I do not draw too much from this as it would not be surprising if no-one could now give clear evidence of why a particular entry was made some years ago.

(f)However, I note that there are no meaningful relevant contemporaneous notes from the Applicant’s files or computer system or LCI’s records in evidence that might provide insight into why the entry was made nor, as previously noted, any evidence of the Applicant or LCI, as one might have expected in the context of multiple progress claims and variations, reconciling progress claims with the corresponding ITCs claimed.

131.There is a particular controversy regarding what was said to be the confusing manner in which Construction Co presented its claims to the Applicant, particularly in those cases where, as it relevantly did in this period, it presented a “negative invoice” rather than a credit note, noting that it prepared credit notes on other occasions (such as in respect of the matter the subject of the April 2016 primary tax assessment). I observed, too, that the minus sign was of such size and placement close to the numerals that it was, although not obscured, not presented in a way that immediately drew it to the attention of the reader.

132.The Commissioner says there is no evidence that any employee of the Applicant or LCI was actually confused by these practices. Mr Incollingo only went so far as to say it is not common to come across tax invoices with negative amounts and he would expect such amounts to be recorded as credit notes.37 But is that sufficient to infer that the person who

37 Affidavit of Gerardo Incollingo dated 7 June 2019, [10].

entered the negative tax invoice was actually confused? On balance, I infer that the incorrect entry of this item was affected by the way in which it was presented; it would be surprising if an adjustment presented as a credit note rather than a negative tax invoice were processed in a way that gave rise to an ITC. That, of course, does not excuse the error as a proper reconciliation would have revealed it, but it does provide context which I take into account.

133.In the end, I am faced with the finding that the Applicant failed to put in place an adequate system and procedures to meet its GST compliance obligations. While it might be argued that amounts to lack of reasonable care rather than recklessness, not having an adequate system of accounting and procedures in the particular circumstances of this case suggests recklessness, since it would almost inevitably lead to errors of the kind which in fact occurred in this case. The absence of checks and balances beyond those built into the accounting software and authorisation processes, particularly reconciliation of multiple variations (which must have been foreseeable as likely occurrences) against their GST treatment, to prevent duplicated ITCs or missed adjustments as occurred, suggests a level of indifference to the accuracy of the Applicant’s GST compliance which, on balance, I am unable to exclude.

134.In those circumstances, I am not satisfied that either the Applicant or LCI exercised reasonable care and were not reckless in preparing the activity statement. It follows that I am not satisfied that the assessment, so far as it reflects a based penalty amount calculated at the rate for recklessness, is excessive.

Increase in base penalty amount?

135.As noted above, the 20% increase may apply where the taxpayer has incurred a penalty in respect of an earlier tax period or obstructs the Commissioner. On the basis that the Applicant has not discharged the burden of proving the shortfall for this and the June 2015 tax period did not arise from recklessness, as I concluded above, it is not necessary for me to consider whether the shortfall for this period was also attended by obstruction. The 20% increase applies in any case.

Should the penalty be remitted?

136.As already indicated in respect of the June 2015 penalty assessment, I consider the taxpayer’s failure to put in place an adequate accounting system and procedures, which has resulted in multiple significant errors over multiple tax periods including the substantial ITC wrongly claimed in this period, to be a powerful indicator against substantial remission of penalties.

137.However, for the reasons indicated in respect of the June 2015 penalty assessment, I take into account but give limited weight to the Applicant’s effort to achieve compliance by engaging accountants to prepare its activity statements. I consider that an overall effective penalty rate, after taking into account overpayments, of around 76% of the aggregate shortfalls net of overpayments, is unduly harsh in the circumstances. The penalty for this period is attended by that harshness and therefore in my view is inappropriate.

138.Having regard to these factors and the issues discussed above, I conclude that the penalty for this tax period should be remitted by 25% (other than in respect of that portion of the penalty which has not been the subject of evidence or submissions and for which it is therefore inappropriate to allow any remission). This approach results in remission of

$20,973.00 of the penalty for this period. The penalty after remission amounts to 45% of the shortfall for the period.

139.Again, this takes into account the harshness identified earlier where the Applicant also underpaid significantly in some periods and makes a modest allowance for the Applicant attempting to comply with its obligations by engaging accountants but balanced to a degree by the Applicant’s less than total co-operation with the Commissioner as evidenced by a degree of tardiness in providing full and accurate information regarding its accounting for GST and the underlying transactions. I have decided that a higher level of remission is warranted in this case to recognise that, as discussed above in relation to the base penalty amount, the error was, as I have inferred, affected though not excused by the way the adjustment was presented by Construction Co.

140.As noted earlier this, along with the remissions proposed for the other contested periods, leaves the aggregate penalty for the audit period as approximately 56% of the total shortfall for the audit period net of overpayments, as set out in the Appendix to these reasons.

141.As with the penalties for the other periods under review, in my view this remission strikes the correct balance – a substantial penalty consistent with the objects of the penalty regime but without the undue harshness attended by the penalty remaining after the objection decision. In the absence of direct evidence of the circumstances giving rise to double claiming of the ITC, there is no evidentiary foundation upon which I could allow any further remission.

Conclusion on remission - September 2015 penalty assessment

142.The objection decision for the penalty assessment for this period will be set aside and substituted with a decision allowing the objection in part, such that the assessment is reduced by the amount of $20,973.00 to be remitted.

APRIL 2016 – PRIMARY TAX

The facts

143.These facts are not in dispute:

(a)The Applicant claimed ITCs in respect of progress claims made by Construction Co, including in respect of Progress Claim 15 (“PC15”), in earlier activity statements.

(b)By email dated 1 April 2016, the Project Director wrote to Construction Co regarding various alleged errors in PC15.

(c)By email dated 6 April 2016 to the Project Director, Construction Co acknowledged various adjustments, which by tracing back to the original claims are found to be in the total amount of $2,612,321.28, needed to be made.38 The Applicant has had the benefit of these adjustments.

(d)Other amounts payable by the Applicant to Construction Co were outstanding. Construction Co advised that a tax invoice for the net amount then said to be outstanding would issue by close of business on 6 April 2016.

(e)That tax invoice duly issued and was emailed to the Applicant on 6 April 2016.

38 The email exchange commences at page 1787 of Exhibit DS-1 to the Affidavit of the Project Director dated 7 June 2019 (Applicant’s Hearing Bundle, Volume (3), Tab 51, page 1989).

(f)Copies of credit notes reflecting these agreed reductions were produced by Construction Co to the Commissioner.

(g)Further email correspondence ensued into May 2016, as discussed below.

(h)The Applicant did not bring to account an increasing adjustment in respect of the adjustments to previous claims referred to in Construction Co’s email of 6 April 2016

– in its activity statement for the April 2016 tax period or for any other period.

144.While Construction Co produced copies of the credit notes to the Commissioner, the Project Manager gave evidence, which I accept, that the Applicant has not been able to locate any record of receiving them. Nor was any copy of an email forwarding the credit notes to the Applicant included in documents produced by Construction Co under summons despite a pattern of provision of tax invoices and other documents to the Applicant by email. Regular site meetings were held but there is no evidence that hard copies of the credit notes were handed over at any such meeting.

145.The Commissioner does not rely upon the credit notes being provided as evidence of the adjustment event he says occurred when Construction Co agreed to the progress claim reductions. For the reasons that follow, I agree that it is not necessary for me to make a finding regarding whether the Applicant received the credit notes for that purpose. The outcome would be the same even if it were assumed that the Applicant did not receive the credit notes.

146.However, as it may be relevant to the penalty issue for this tax period, it is desirable that I make a finding on whether the Applicant in fact received the six credit notes. The evidence of the Project Director is that the Applicant has not been able to locate copies of the credit notes. Importantly, materials required to be produced by Construction Co under summons included copies of any email or emails forwarding the credit notes to the Applicant, but no copies of emails forwarding the credit notes to the Applicant were produced by Construction Co. Additionally, as Mr Peadon pointed out, while notes of site meetings descend into relatively insignificant details, they contain no reference to credit notes being handed over. If they had been emailed to the Applicant, it is to be expected that Construction Co would be able to produce copies of the forwarding emails and Construction Co produced no record of them being handed over at site meetings, nor does the Project Director recall credit notes

or other such documents being hand delivered at any site meeting.39 I have no reason to doubt they were prepared by Construction Co as it says, but on balance I am satisfied the credit notes were not received by the Applicant.

The parties’ submissions – in summary

147.The Applicant says that commercial negotiations continued into May 2016 and it was not until that month that the change in the consideration contractually payable was finally agreed between Construction Co and the Applicant. On that basis, the adjustment is, the Applicant says, not attributed to the Applicant’s April 2016 tax period but rather to the May 2016 tax period.

148.Alternatively, the Applicant says the adjustment was not attributed to the April 2016 tax period because it should not be taken to have been aware of the adjustment during that month. The pattern of conduct between the parties was that Construction Co would confirm variations in a credit note/“negative invoice” which for the contested adjustment the Applicant did not receive in April 2016.

149.In other words, the Applicant does not deny that it is liable for the increasing adjustment, but says it occurred later or at least it only became aware of it later, and therefore the increasing adjustment is not attributed to April 2016, the only relevant tax period before the Tribunal.

150.The Commissioner relies upon his construction of the email exchanges and related documents referred to above for the conclusion that the consideration was varied in April 2016. On the basis that the Applicant was aware of the change through the email correspondence with the Project Manager, the Commissioner says the adjustment is correctly attributed to the April 2016 tax period.

Conclusion – the increasing adjustment is attributed to the April 2016 tax period

151.On the face of the 6 April 2016 email, it is clear that Construction Co has agreed to reduce the amount payable. In the context of the Applicant seeking reductions in the amount

39 Affidavit of Project Director dated 7 June 2019, paragraph 11.

payable and Construction Co agreeing in writing to the reductions, and following that agreement with a tax invoice reflecting the amounts set out in Construction Co’s email that remained payable, it is in my view clear agreement had been reached that the amount to be paid had changed. It follows that an adjustment event had occurred. While the Applicant refers to subsequent email correspondence as evidence of ongoing negotiations, examination of these later exchanges suggests they relate to different subject matter, namely Progress Claim 16.40 On the basis of the available documentary evidence, I am not satisfied that they evidence, as Mr Peadon submitted, ongoing negotiations in relation to PC15.

152.Once that conclusion is reached, the Applicant’s submission that, if the adjustment event had occurred the Applicant had not become aware of it, must be rejected. Construction Co’s acceptance of the reductions was communicated directly to the Project Manager who the Applicant’s own submissions describe as the key person responsible for the dealings between Construction Co and the Applicant. This is confirmed by the Project Director’s affidavit which lists as his responsibilities the administration and oversight of all invoices and progress claims.41 Mr Incollingo stated the Project Director “had the internal management of [the Project]” and would typically authorise invoices.42

153.It follows that I do not accept the Applicant has discharged the burden of proving the April 2016 primary tax assessment is excessive and the objection decision in respect of the primary tax assessment for this period must be affirmed.

APRIL 2016 - PENALTY TAX ASSESSMENT

154.This penalty assessment is in the amount of $132,651.00 calculated at the rate of 50% for recklessness, increased by 20%.

155.The shortfall for this period relates to the increasing adjustment for the change in consideration which the Applicant failed to bring to account in this tax period (or any other tax period).

40 Applicant’s Hearing Bundle, Tabs 3 and 4.

41 Affidavit of Project Director dated 7 June 2019, paragraph 8.

42 Affidavit of Gerardo Incollingo dated 7 June 2019, paragraph 8.

Base penalty amount?

156.If it were the case that the Applicant merely failed to identify that the correspondence referred to above gave rise to an adjustment in this tax period, I might be persuaded that an assessment of penalty at the rate for recklessness would not be appropriate. However, this is not a case where the taxpayer reasonably took a different view of the tax period to which the adjustment is properly attributed. Notwithstanding that it took the benefit of the reductions in the progress claim, it did not bring an increasing adjustment to account at all.

157.The Applicant’s submissions suggested that, even if its submission regarding the construction of the sequence of emails mentioned in the discussion of the primary tax assessment is not accepted, that would not have been an unreasonable position for the Applicant to take. Even if that is so, though, there is no evidence that the Applicant engaged with this issue at all in preparing the activity statement. It is not a case where the Applicant has taken a position which, although not ultimately accepted, was reasonable in the circumstances. As noted, the Applicant has not brought the adjustment to account in any tax period.

158.I have, as noted above, found that the Applicant never received the relevant credit notes. Without more, in the face of that finding, I might not regard the Applicant’s conduct in not bringing an increasing adjustment to account in the correct tax period as reckless or even necessarily indicating lack of reasonable care. But there is more: The Applicant took the benefit of a substantial adjustment – in excess of $2,600,00.00 - but did not adjust its GST. Importantly, how or why that occurred remains unexplained.

159.That the correspondence and documents from Construction Co may have been confusing, as the Applicant submits, might inferentially provide some explanation for a failure to bring the adjustment to account in the correct tax period, as does my finding that the credit notes were not received by the Applicant. However, that does not explain the failure to account for the adjustment at all in circumstances where the Applicant took the benefit of the adjustments. There is no evidence to explain what, if any, process of reconciliation the Applicant had in place to ensure that downward adjustments in amounts claimed by Construction Co would result in corresponding adjustments in ITCs claimed by the Applicant, which the Applicant acknowledges did not occur in this case.

160.In the absence of evidence explaining the failure to bring this substantial adjustment to account, or processes to ensure reductions in obligations to Construction Co for which the Applicant had previously claimed substantial GST benefits would be met with corresponding GST adjustments, and having regard to my earlier finding regarding the failure of the Applicant to put in place an adequate accounting system and procedures for its GST compliance, I am not satisfied the Applicant has discharged the burden of proving the assessment of the base penalty amount at the rate for recklessness is excessive.

Increase in base penalty amount?

161.As previously noted, the 20% increase may apply where a taxpayer incurred a penalty in respect of an earlier tax period or obstructs the Commissioner. On the basis that the Applicant has not discharged the burden of proving that the shortfalls for the June 2015 and September 2015 tax periods did not arise from recklessness or lack of reasonable care, as I concluded above, it is not necessary for me to consider whether the shortfall for this period was also attended by obstruction. The 20% increase applies in any case. The uncontested penalty assessed in respect of the March 2016 tax period further supports that conclusion in respect of this tax period.

Should the penalty be remitted?

162.As already indicated in respect of the other penalty assessments, I consider the taxpayer’s failure to put in place an adequate accounting system, which has resulted in multiple significant errors over multiple tax periods including the substantial increasing adjustment not brought to account in this period (or any other period), to be a powerful indicator against substantial remission of penalties.

163.For the reasons indicated in respect of the June 2015 penalty assessment, I take into account but give limited weight to the Applicant’s effort to achieve compliance by engaging accountants to prepare its activity statements but I consider an overall effective penalty rate of approximately 75% of the aggregate shortfalls net of overpayments is unduly harsh in the circumstances. As this assessment is attended by that harshness it is appropriate to remit the penalty in part.

164.Having regard to these factors and the issues discussed above, I conclude that the penalty for this tax period should be remitted by 30% or $39,796.00. This results in a penalty of

around 42% of the shortfall for this period, amounting to $92,856.00. It takes into account the harshness identified earlier where the Applicant also underpaid significantly in some periods and makes a modest allowance for the Applicant attempting to comply with its obligations by engaging accountants. It also takes into account that these considerations are balanced to a degree by the less than total co-operation with the Commissioner displayed by the Applicant as evidenced by a degree of tardiness in providing full and accurate information regarding its accounting for GST and the underlying transactions.

165.I have concluded that a higher remission is warranted for this tax period as the shortfall was contributed to by the Applicant not receiving the relevant credit notes. That does not excuse the shortfall as the Applicant took the benefit of the reductions in the progress claim without reducing its corresponding GST benefit and without, so far as the evidence indicates, any process of reconciliation to prevent errors of this kind occurring. However, it does provide some ameliorating context for the error.

166.Combined with the remissions for the other two periods, this leaves the aggregate penalty for the audit period as approximately 56% of the total of the net underpayments, as set out in the Appendix to these reasons. As with the penalties for the other periods under review, in my view this strikes the correct balance – a substantial penalty but without the undue harshness attended by the penalty remaining after the objection decision and giving the weight I consider appropriate to the particular circumstances in which the shortfall arose.

Conclusion on remission – April 2016 penalty assessment

167.The objection decision will be set aside and substituted with a decision allowing the objection in part, to reflect remission of the penalty by $39,796.00.

168.For completeness, I note that the safe harbour is not engaged in relation to any of the penalty assessments because the Applicant has not satisfied me that LCI was not reckless in relation to the operation of the tax law given the substantial and largely unexplained errors. I do not conclude that LCI was reckless but on the evidence I am unable to be satisfied that it was not. In any case, there is insufficient evidence to conclude that the Applicant made all relevant information available to LCI in relation to the overclaimed ITCs and other amounts the subject of the penalty assessments to enable it to accurately determine their GST treatment. That is evident from the difficulties experienced by Mr

Incollingo leading up to the hearing of the application for review in explaining the cause of the shortfalls.

APPENDIX

Tax period	Shortfall $	Penalty after objection decision $	% of shortfall	Remission $	Penalty after remission $	% of shortfall	% of net under- payments
March 2015	(38,308)
June 2015	98,458	49,229	50%	9,846	39,383	40%
Sept 2015	139,817  13,140 152,957	83,890  7,884 91,774	60% 60%	20,973 0	62,917 7,884	45% 60%
Dec 2015	(38,147)
March 2016	12,427	7,427	60%	0	7,427	60%
April 2016	221,085	132,651	60%	39,795	92,856	42%
June 2016	(34,175)
Totals:	$374,297 $484,92743	$281,081	58%	70,614	210,467	43.4%	56.2%

43 The amount of $373,297 is the total of the shortfall amounts less the overpayments across the audit period. The amount of $484,927 is the total of the shortfalls across the audit period.

I certify that the preceding 168 (one hundred and sixty-eight) paragraphs are a true copy of the reasons for the decision herein of SM Olding

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

Associate

Dated: 26 February 2021

Date(s)ofhearing:	28-30 October 2020
CounselfortheApplicant:	Mr C Peadon and Mr D Lewis
SolicitorsfortheApplicant:	Mr C Azzi, Lionheart Lawyers
CounselfortheRespondent:	Ms K Deards SC and Ms C Ensor
SolicitorsfortheRespondent:	Mr J Tsianikas, Australian Government Solicitor