Cartesian Capital Pty Ltd and Commissioner of Taxation
[2014] AATA 49
•31 January 2014
[2014] AATA 49
Division Taxation Appeals Division File Number(s)
2013/0685
Re
Cartesian Capital Pty Ltd
APPLICANT
And
Commissioner of Taxation
RESPONDENT
Decision
Tribunal Mr P W Taylor SC, Senior Member
Date 31 January 2014 Place Sydney The penalty decision under review is set aside in relation to the June 2010 quarter and varied as follows:
(a) the shortfall amount is assessed as $1,133.61 (ie $1,702 less $568.39); and
(b) the penalty amount is assessed at $566.80 (ie 50% of the shortfall amount).
The penalty decision under review is otherwise affirmed.
.....................[SGD]...................................................
Mr P W Taylor SC, Senior Member
Catchwords
TAXATION AND REVENUE – goods and services tax – entitlement to input tax credits – administrative penalty – calculation of penalty based on tax shortfall – whether conduct involved recklessness – whether applicant entitled to remission of penalty – decision in relation to June 2010 quarter set aside and varied and remainder of decision under review is affirmed
Legislation
A New Tax System (Goods and Services Tax) Act 1999; ss 7-1 - 7-15, 9-5, 11-5, 11-15, 11-30, 29-10, 29-70, 40-5, 48-5 - 48-15, 48-40, 48-45, 189-5
A New Tax System (Goods and Services Tax) Regulations 1999
Taxation Administration Act 1953 Sch 1 s 284-75, 284-85, 298-20, 298-30
Cases
BRK (Bris) Pty Ltd v FCT [2001] FCA 164
Secondary Materials
Miscellaneous Taxation Ruling MT 2008/: Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard
Practice Statement Law Administration PS LA 2012/5: Administration of Penalties for making false or misleading statements that result in shortfall amounts
REASONS FOR DECISION
Mr P W Taylor SC, Senior Member
Cartesian Capital Pty Ltd (“Cartesian”) wants the Tribunal to remit $15,535 in penalties. The Commissioner imposed the penalties because of the overstatement of input tax credits in 9 quarterly Business Activity Statements (“BAS”) for the quarter ended September 2008 and those from March 2009 to December 2010.
Cartesian did not claim any input tax credits in the BAS it originally submitted for the periods in dispute. But it submitted amended BAS in December 2010. In the amended BAS Cartesian claimed input tax credits totalling about $32,000.
In February 2011 the Commissioner’s staff notified Cartesian of its intention to audit the December 2009 BAS. Cartesian provided additional information on 15, 25 and 30 March 2011. The Commissioner did not regard this information as satisfactory. In April 2011 the Commissioner notified Cartesian that the audit would include Cartesian’s March 2009 BAS.
In May 2011, after Cartesian had provided some further information, the Commissioner rejected the input tax credit claims for the audited BAS periods. The principal basis for that decision was that Cartesian did not have valid tax invoices when it submitted the claims. The Commissioner also rejected Cartesian’s input tax credit claims in all of the other revised BAS submitted on 17 December 2010. The basis for rejecting those other claims was an assumption that Cartesian did not hold relevant tax invoices for any of the periods covered by the revised BAS.
On 1 March 2012 Cartesian gave the Commissioner a formal notice of objection. In the following months it provided some further information, and abandoned some claims which it conceded had been made in error. (Those claims are Items 2 & 3 in the accompanying schedule – to which I refer in paragraph 7 of these reasons.) In December 2012, in response to Cartesian’s 1 March 2012 Notice of Objection, the Commissioner disallowed most of those claims, and imposed consequential penalties, which it partially remitted. Cartesian asks the Tribunal to review the penalty aspects of the Commissioner’s decision.
Cartesian’s claims
Cartesian provided many documents to the Commissioner in an attempt to justify the claims made in the revised BAS. At the hearing of the present proceedings Cartesian tendered a spreadsheet summarising its claims, and the basis for its initial objection to the Commissioner’s decision. That spreadsheet included a list of purportedly substantiating invoices and account statements.
In the Schedule that accompanies these reasons I have attempted to summarise both the effect of the Commissioner’s decision, and the material provided by Cartesian. In relation to the Commissioner’s decision, the Schedule deals with each BAS period from September 2008 to December 2010 (including the December 2008 BAS, for which no claim was made). It contains (in Column 2) a summary of the GST expenses evidenced by a document Cartesian provided to the Commissioner in May 2011. It also contains a summary of the input tax credit claims in the individual BAS under consideration, and the ultimate effect of the Commissioner’s decision (Columns 3 to 6).
In relation to the documents Cartesian provided to the Commissioner I have included in the Schedule basic details of all the principally relevant documents (typically invoices or statements of account). Some of these documents (those with reference numbers from T5 to T9) Cartesian provided during the audit period (between 15 March and 23 May 2011). Other documents (those with references numbers T18 and T19) Cartesian provided for the purpose of its March 2012 Objection. Where Cartesian obtained the relevant document after the BAS quarter to which it related, I have shaded that entry in the schedule. Where Cartesian withdrew a particular claim in the course of the audit or objection process, I have used “
strikethrough” font in summarising the details of the document.The “Item” column in the accompanying Schedule refers to invoices, statements or claims that the Commissioner’s 17 December 2012 statement of reasons specifically addressed. The “GST Summary” column in the schedule sets out the effect of an accounting summary that Cartesian provided to the Commissioner in the course of the audit. It appears to have been an extract from financial records which summarised its contemporaneous accounting treatment of its GST payments. In the various “subtotal” rows in the Schedule I have set out the subtotal of the relevant invoices or statements that are purportedly relevant to Cartesian’s claims. The “ATO Decision” column in the Schedule provides an abbreviated summary of the Commissioner’s reason for either allowing or rejecting the claim to which a particular invoice or statement purportedly related.
The information presented in the accompanying Schedule permits a number of observations to be made about the input tax credit claims Cartesian made in the various revised BAS it submitted in December 2010. Those observations are:
(c)the claim amounts for the March and December 2009 quarters bore no relationship to its own GST Summary
(d)the claim amounts for the March, June and December 2009 quarters bore no discernible relationship to any of the invoices that were dated in the relevant quarter between January and March 2009
(e)although the claim amount for the September 2009 quarter approximates the invoices identified for that quarter, only one of them was contemporaneously available to Cartesian
(f)the claim amounts for the March and June 2010 quarters bore no discernible relationship to any of the invoices that were dated in the relevant quarter
(g)Cartesian did not identify any particular invoices as substantiating the claims for the September and December 2010 quarters.
Cartesian’s position at the review hearing
Shortly before the hearing Cartesian (more accurately the accountants who represented them in the proceedings) wrote to the Tribunal confirming that it would only pursue its objection to the Commissioner’s penalty decision, rather than to the disallowance of the input tax credit claims themselves. Cartesian contended that the apparent $31,070 shortfall identified in the Commissioner’s decision was to be accounted for in the following way:
Items
Description
Amount
Total Shortfall determined by Commissioner 31,070 Less unspecified Equity 8 pl - actual input tax credit entitlements 25,360 11 entitlement if Cartesian and FMS Global Capital grouped for GST 4,546 subtotal 29,906 Balance unspecified unsubstantiated input tax credit claims 1,164
Based on this proposed reconciliation Cartesian contended that the shortfall it identified was minimal in amount. It said that responsibility for the irregularities in the revised BAS lay primarily with Cartesian’s accountants and tax agents, particularly in assuming that Cartesian and its related companies had been grouped for GST reporting purposes. (The letter pointed out that the companies had in fact been grouped for GST purposes since 1 July 2011.) Whilst conceding that the audit showed the revised BAS “may perhaps have been ill-advised and possibly imprudent” Cartesian said they had certainly not been prepared and submitted recklessly.
Factual background to the claims
The factual origin for Cartesian’s input tax credit claims, and the Commissioner’s December 2012 penalty decision, lies in a 2008 controversy between various persons involved in Cartesian Capital. They were Messrs Wookey and Martin, on the one hand, and Messrs Dacres-Manning and Kidston, on the other. Mr Wookey is a qualified accountant and a former company auditor. But he has worked exclusively in the securities industry, in various roles as an analyst, adviser or manager rather than as a practising accountant, since 1986. He was the managing director of Cartesian Capital from 2004 to 2007. He returned to that role in 2009, after the resolution of the controversy.
Cartesian’s principal business was as a facilitator of corporate capital raising. It acted in association with two related companies – Equity 8 Pty Ltd (renamed FMS Global Capital Pty Ltd in about October 2009) and Cartesian Capital Finance Corporation Pty Ltd (formerly Reveil Corporate Finance Pty Ltd). Equity 8 Pty Ltd provided personnel and administrative services to Cartesian. Cartesian carried on business as an “authorised representative” of Cartesian Capital Finance Pty Ltd, which held an Australian Financial Services Licence.
The 2008 controversy involved District Court proceedings in which Cartesian and Equity 8, at the instance primarily of Mr Dacres-Manning and Mr Kidston, sought to recover allegedly irregular payments the companies had made either to Mr Wookey, or to entities associated with him. For his part, Mr Wookey appears to have contended (i) that Mr Dacres-Manning had no authority to institute the proceedings on behalf of the two companies and (ii) was diverting Cartesian Capital’s business to another entity.
The controversy was quelled by a Settlement Deed in April 2009. The parties to the Deed included Cartesian, Equity 8 and the various individuals I have referred to above. Under the terms of the Deed, the parties were to bear their own costs of the proceedings, subject to specified contributions to be made by Cartesian for costs incurred by the individual parties ($24,000 for fees incurred by Mr Dacres-Manning, $12,000 for fees incurred by Mr Wookey, and $6,000 for fees incurred by Mr Martin). Apart from those provisions about costs, the practical effect of the Settlement Deed was that, by about August 2009, Mr Wookey resumed effective control of Cartesian and its related entities.
Mr Wookey gave evidence that Cartesian’s accounting affairs, and those of the other companies, were in disarray when he resumed the role of Cartesian’s managing director. This was a matter of particular concern in relation to Cartesian Corporate Finance Pty Ltd, because of the compliance requirements associated with its Australian Financial Services Licence. Mr Wookey undertook a reconstruction of the various entities’ financial accounts. He did this based on an examination of bank statements, and such supporting primary records as he could locate, as well as his knowledge of the relationship between the corporate entities, and the kinds of business they conducted. His reconstruction involved a suggested apportionment of some kinds of expenses between the various companies associated with Cartesian.
Mr Wookey provided this reconstruction, in the form of an Excel spreadsheet and some supporting documents, to Cartesian’s external accountants. Significantly, the evidence did not affirmatively establish that external accountants were actually provided with any tax invoices before they submitted the amended BAS in December 2010. And it is certainly the case that some of the invoices (at least those whose details are shaded in the Schedule accompanying these reasons) were not available to Mr Wookey (or the other then current directors of Cartesian) at that time.
Input tax credit entitlement
GST is payable on taxable supplies. Conversely, a taxpayer may have an entitlement to an “input tax credit” for “creditable acquisitions”. The taxpayer’s GST obligation is to pay the net amount of its payment liabilities and credit entitlements for any tax period: see ss 7-1 to 7-15 of A New Tax System (Goods and Services Tax) Act 1999 (“the GST Act”).
In general terms, acquisitions for business purposes by a taxpayer who is (or is required to be) GST registered, are “creditable” if the taxpayer has provided consideration, and obtained the relevant goods or services from a supplier who is liable to GST in relation to the supply. However, acquisitions are only “creditable” to the extent that the taxpayer makes them for the purpose of the enterprise they carry on, and to the extent they provided (or were liable to provide) the consideration. There is no GST liability for supplies that are “input taxed”: see ss 9-5, 11-5, 11-15 & 11-30 of the GST Act. Supplies that are “input taxed” include at least some kinds of “financial supplies”, to the extent that they exceed 10% of a taxpayer’s total potential input tax credits for a 12 month period: see ss 11-15(4), 40-5 & 189-5 of the GST Act, and regulation 40 5.08 of A New Tax System (Goods and Services Tax) Regulations 1999.
Where associated taxpayers satisfy certain membership requirements, and nominate a representative, they may form a “GST group”: see ss 48-5 to 48-15 of the GST Act. In such a case only the nominated representative is liable for GST and entitled to any input tax credits that would otherwise apply to the group members: see ss 48-40 & 48-45 of the GST Act.
Input tax credits are generally attributable to the period in which a taxpayer provides any of the consideration for the relevant acquisition. This general proposition is subject to a number of qualifications. First of all, where a taxpayer accounts for GST on a cash basis (as did Cartesian) input tax credits are only attributable to the period in which the taxpayer provided consideration, and only to the extent of the consideration provided in that period. The second qualification is that credits may only be attributed to an otherwise applicable period where the taxpayer holds a tax invoice for the acquisition when they submit their GST return to the Commissioner (unless the Commissioner makes a written determination that no tax invoice is required). Where a taxpayer does not hold a tax invoice at that time, the acquisition is creditable to the first tax period after the taxpayer obtains such an invoice: see ss 29-10 of the GST Act.
According to s 29-70 of the GST Act, a tax invoice must generally be in an approved form and include:
(a)the supplier’s identity and ABN
(b)the recipient’s identity or ABN (unless the price is less than $1,000)
(c)the nature, quantity and price of the supply
(d)the extent to which the supply is taxable
(e)the date of the supply
(f)the GST amount.
Those general requirements about the form and content of a tax invoice are subject to two main qualifications. The first qualification is that a document may be treated as a tax invoice if information that it omits can clearly be obtained from other documents provided by the supplier. The second qualification is that the Commissioner has a discretion to treat an otherwise non-complying document as a tax invoice: see s 29-70 of the GST Act.
Shortfall penalties
Under s 284-75(1), (5) and (6) of Schedule 1 to the Taxation Administration Act 1953 (“TAA 1953”), a person is liable to an administrative penalty if they make false or misleading statements to the Commissioner in connection with the administration of a taxation law, and have not taken reasonable care in connection with making the statement. Where the statement has been made by a registered tax agent, the taxpayer may not be liable for an administrative penalty if they have given the agent all relevant taxation information.
The amount of any administrative penalty is subject to assessment by the Commissioner under s 298-30 of the TAA 1953. The assessment amount depends upon the application of s 284-85 of the TAA 1953. If an impugned statement results in the taxpayer having a “shortfall amount” in either a tax related liability of the taxpayer, or in the amount of any taxation law credit to which they are entitled, the administrative penalty will be 75%, 50% or 25% of the shortfall amount – depending upon the extent to which the shortfall amount resulted from intentional disregard of a taxation law, recklessness as to the operation of a taxation law, or a failure to take reasonable care to comply with a taxation law.
The Commissioner decided that Cartesian’s claims in relation to the disallowed expense claims were false or materially misleading, and that the resultant shortfall was caused by “recklessness … as to the operation of a taxation law”. Consequently the Commissioner’s 17 December 2012 assessment decision applied an administrative penalty of 50% of the $31,070 shortfall amount.
The concept of “recklessness … as to the operation of a taxation law” is elaborated upon in Miscellaneous Taxation Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard. According to MT 2008/1 (at paragraphs [100] – [102]) the concept or recklessness in relation to the operation of a taxation law involves an essentially objective test. The essential consideration is whether or not the taxpayer’s behaviour (or that of their agent) falls significantly short of the standard of care expected of a reasonable person in the same circumstances, and shows a disregard of, or indifference to, a foreseeable risk. In BRK (Bris) Pty Ltd v FCT [2001] FCA 164, Cooper J said that in the present context the concept of recklessness meant:
… to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real as opposed to fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement maker would see there was a real risk that ... [the relevant Act and regulations] may not operate correctly to lead to the assessment of the proper tax payable because of the content of the statement.
Cartesian’s penalty liability
The September 2008 BAS: The Commissioner’s December 2012 assessment accepted that Cartesian satisfied, or should be treated as satisfying, the tax invoice requirements in relation to this period. The Commissioner disallowed the full claim on the express basis that only part of the accounting services related to Cartesian itself and on the implicit basis that Cartesian had not formed a GST group, so as to entitle it to claim input tax credits as a nominated group representative. Cartesian contended that it was a matter of mere oversight that it was unaware of the absence of a GST group.
I do not accept that the absence of a formal GST group was, or can be accepted as, a matter of mere oversight. The 30 June 2008 invoice from Edney Ryan (Item 1 in the Schedule) disclosed on its face that it related to services supplied to Cartesian, Equity 8 Pty Ltd and to Reveil Corporate Finance Pty Ltd. Furthermore, the invoice also disclosed that Cartesian made no payments until March, May and October 2009. These circumstances, and specifically the fact that the services were provided to three different companies, required care in making the amended claim. And if the claim was pursued only on behalf of one company (Cartesian) reasonable care required more than a mere assumption that there was a permissible GST group for the purpose of the amended BAS. Whilst the actual content of the amended BAS may have been primarily the direct responsibility of Cartesian’s tax agents, the evidence suggests that Cartesian never provided them with the invoice, and thus never disclosed the fact that the claim related to services that had been supplied to different companies.
The matters I have referred to in the preceding paragraphs evidence an absence of attention to detail and accuracy in the quantification of the input tax credit claim made in the amended BAS for the September 2008 quarter. It is my view that the lack of attention and accuracy, when the relevant invoice patently disclosed services being provided to different companies, and when Cartesian did not supply the invoice to its tax agent demonstrates a gross failure to apply a reasonable standard of care, and in fact reflects recklessness in relation to the operation of a taxation law.
The March 2009 quarters: The information contained in the Schedule shows that it is not possible to reconcile the amount of the input tax credit Cartesian claimed with the invoices it subsequently provided to the Commissioner and relied on in the present proceedings. Cartesian conceded (in a letter to the Commissioner in October 2012) that it erred in claiming input tax credits for the Cartesian Corporate Finance invoices (items 2 and 3) in the Schedule, but never offered any real explanation for the error. The remaining invoices dated between January and March 2009, which relate to legal fees invoiced to Mr Dacres-Manning in connection with the District Court proceedings referred to in paragraph 15 above, were not shown to have been held by Cartesian until March 2011. Furthermore, despite the date of the invoices, Cartesian paid only an amount of $41,000 in a single payment that it made on about 19 October 2009. Finally, there is no correlation between the input credit claim amounts and the “GST Summary” apparently evident from Cartesian’s contemporaneous accounting records.
I recorded in paragraphs 17 and 18 above, the effect of Mr Wookey’s evidence about the disarray in Cartesian’s accounting affairs when he resumed effective practical control of the company’s affairs in the latter part of 2009. I accept that, with the background of that disarray, he experienced considerable difficulty in determining the true state of the company’s affairs and, in particular, its GST liabilities and entitlements. However, a reasonable person in Cartesian’s position at that time, and certainly at the time of submitting the amended BAS in December 2010, would have been scrupulous in attempting to establish the true and actual extent of their GST entitlement in relation to input tax credits.
The Commissioner complained, in his submissions in the present proceedings, that Cartesian had not provided any reconciliation to explain the actual amount of the input tax credit claims that had been made in the amended BAS. That complaint is well founded in fact, and has obvious force. It derives additional force from the circumstance that Cartesian’s accountants’ letter of 6 November 2013 foreshadowed that 22 complying tax invoices would be tendered at the hearing to substantiate the reconciliation suggested in paragraph 11 above. As the accompanying Schedule indicates, no such invoices, and no such reconciliation, were produced at the hearing.
In the absence of specific evidence about the composition of the amount of the input tax credit claim in the amended March 2009 BAS, it is not possible to arrive at a definite conclusion as to whether the primary causative responsibility for the erroneous statements made in the amended BAS lies with Cartesian or its tax agents. However it is clear that Cartesian did not establish that it provided those agents with the substantiating tax invoices. And it is difficult to understand how the tax agents could, without access to those invoices, properly have arrived at the amount of the input tax credit claim contained in the amended assessment.
The matters I have referred to in the preceding paragraphs evidence a very great absence of attention to detail and accuracy in the quantification of the input tax credit claim made in the amended BAS for the March 2009 quarter. It is my view that the lack of attention and accuracy demonstrates a gross failure to apply a reasonable standard of care, and in fact reflects recklessness in relation to the operation of a taxation law.
The June 2009 quarter: The information contained in the Schedule again shows that it is not possible to reconcile the amount of the input tax credit Cartesian claimed with the invoices it subsequently provided to the Commissioner and relied on in the present proceedings. In this instance the amount claimed at least corresponded to Cartesian’s “GST summary”. But that fact only highlights the reality that either some basis, other than the actual invoice amounts, was relied on to quantify the claim amount, or it was a mere estimate. There was no evidence to permit any reliable finding to differentiate between those possible alternatives.
In reality, the only invoice Cartesian held in December 2010 that could have provided any possible proper basis for the input tax credit claim was the 24 June 2009 invoice furnished by Edney Ryan. But that invoice (i) disclosed on its face that it related to services provided to Equity 8 Pty Ltd and to Reveil Corporate Finance Pty Ltd, and (ii) appears not to have been the subject of any payment by Cartesian until about 19 October 2009. All of these matters call into question the basis for the claim quantified in the amended BAS, and suggest that it could only have been arrived at as a result of gross neglect of, or indifference to, the information available as at December 2010. That suggestion is more readily adopted as the proper inference when regard is had to Cartesian’s failure to provide evidence to substantiate the reconciliation asserted in its accountants’ letter of 6 November 2013.
The matters I have referred to in the preceding paragraphs again evidence a very great absence of attention to detail and accuracy, in the quantification of the input tax credit claim made in the amended BAS for the June 2009 quarter. It is my view that the lack of attention and accuracy demonstrates a gross failure to apply a reasonable standard of care, and in fact reflects recklessness in relation to the operation of a taxation law.
The September 2009 quarter: The input tax credit claim amount in the amended September 2009 BAS did approximate both Cartesian’s “GST Summary” and the total amount of the invoices dated between August and September 2009. But those invoices in fact provide no support for the claim amount. Cartesian did not hold the invoices addressed to Mr Dacres-Manning when it submitted the amended BAS in December 2010. Cartesian did not in fact show that it had made any payment to de Mestre until about 19 October 2009. And even though it may be assumed that Cartesian had the Middletons’ invoice at the relevant time, it does not appear to have made any payment to Middletons until 19 October 2009 – when it made a payment of only $3,199. For all of these reasons, it is readily apparent that there was no discernible objective basis for the amount of the input tax credit claim in the amended September 2009 BAS.
The matters I have referred to in the preceding paragraph suggest a very great absence of attention to detail and accuracy, in the quantification of the input tax credit claim made in the amended BAS for the September 2009 quarter. It is my view that the lack of attention and accuracy demonstrates a gross failure to apply a reasonable standard of care, and in fact reflects recklessness in relation to the operation of a taxation law.
The December 2009 quarter: The input tax credit claim for this quarter has no basis discernible from the material proffered by Cartesian. Only three of the invoices identified in the Schedule accompanying these reasons were addressed to Cartesian itself. Two of those demonstrate, on their face, that they do not relate to acquisitions by Cartesian itself. One of the other invoices (Item 12 in the Schedule) appears to evidence a supply (by FMS Global Capital Pty Ltd) rather than an acquisition by Cartesian. Another invoice (the 13 October 2009 de Mestre invoice) Cartesian did not hold until some time in March 2011. The claim amount approximates close to double the amount of the invoices provided by Cartesian, and is almost six times the amount indicated in Cartesian’s “GST Summary”. Despite all of these apparent shortcomings, and the reconciliation Cartesian’s accountants asserted in the 6 November 2013 letter, Cartesian provided no real explanation for the quantification of the input tax credit claim in the amended BAS.
The matters I have referred to in the preceding paragraph suggest a very great absence of attention to detail and accuracy, in the quantification of the input tax credit claim made in the amended BAS for the December 2009 quarter. It is my view that the lack of attention and accuracy demonstrates a gross failure to apply a reasonable standard of care, and in fact reflects recklessness in relation to the operation of a taxation law.
The March 2010 quarter: The input tax credit claim in the amended BAS was the same as the amount in Cartesian’s “GST Summary”, but had no proper justification in the invoices on which Cartesian purported to rely. The only identified invoice that could conceivably have provided some justification for the amount of the claim was that issued by Wookey Capital on 1 January 2010. But that invoice included a GST amount that was more than double the amount of the input tax credit claim, and appears to relate to a financial supply. The totality of these considerations suggest that the invoice in fact played no part in the quantification of the input tax credit claim amount. Notwithstanding that appearance, Cartesian provided no other basis to explain or justify the amount.
The matters I have referred to in the preceding paragraph evidence an absence of attention to detail and accuracy, in the quantification of the input tax credit claim made in the amended BAS for the March 2010 quarter. It is my view that the lack of attention and accuracy demonstrates a gross failure to apply a reasonable standard of care, and in fact reflects recklessness in relation to the operation of a taxation law.
The June 2010 quarter: The input tax credit claim in the amended BAS was the same as the amount in Cartesian’s “GST Summary”, but had no proper justification in the invoices on which Cartesian purported to rely. Only three of the documents were addressed to Cartesian, and only one of them was an invoice that stated the GST amount payable. The Commissioner disallowed that input tax credit claim on the basis that the supplier’s ABN on the invoice was incorrect (see Item 13 in the accompanying Schedule). The other three amounts claimed were small amounts relating to air fares and accommodation. I note that claims were not specifically addressed in the Commissioner’s objection decision and that claims for these kinds of expenses were in fact allowed by the Commissioner in relation to the December 2010 BAS.
The matters I have referred to in the preceding paragraph evidence an absence of attention to detail and accuracy, in the quantification of the input tax credit claim made in the amended BAS for the June 2010 quarter. It is my view that the lack of attention and accuracy partly demonstrates failure to apply a reasonable standard of care, and reflects recklessness in relation to the operation of a taxation law. I do not however regard the claim as relevantly either reckless, or lacking in reasonable care, in relation to either the minor claims for air travel and accommodation or in relation to the Item 12 claim. The air travel and accommodation expenses were evidenced by documents of a kind commonly provided for services of that kind. The Item 12 claim was only regarded as not creditable because of the inaccuracy in the ABN provided by the supplier. It is my view that reasonable care did not require Cartesian to form its own view about the accuracy of such a detail in a document provided by the supplier.
The September and December 2010 quarters: Cartesian provided no basis for the amount of the input tax credit claims in these quarters. This failure occurred despite the contents of Cartesian’s accountants’ letter of 6 November 2013. In those circumstances Cartesian cannot show that the Commissioner’s assessment was excessive.
Summary of the penalty findings
In the light of the findings I have made in the immediately preceding section of these reasons Cartesian has succeeded in establishing that it did not fail to exercise reasonable care in relation to three items (reflecting input tax credit claims totalling $568.39) in relation to the June 2010 BAS. Cartesian has otherwise failed to establish that the Commissioner’s penalty assessment was excessive.
The discretion to remit penalties
Even where a taxpayer is liable to an administrative penalty, section 298-20 of Schedule 1 to the TAA 1953 gives the Commissioner a general discretion to remit the penalty, either wholly or in part. Guidelines for the exercise of that discretion are set out in Practice Statement Law Administration PS LA 2012/5 Administration of Penalties for making false or misleading statements that result in shortfall amounts. The guidelines emphasise that the purpose of the penalty regime is to encourage taxpayers to take reasonable care in complying with their tax obligations. It emphasises that the objective would be compromised if the discretion to remit penalties was exercised either as a matter of course or without proper cause. However, it goes on to say that the discretion to remit penalties should be administered in a fair and reasonable way and without causing unintended or unjust results. The statement contains an explicit exegesis that where a taxpayer has made a genuine attempt to report correctly it will generally be the case that no penalty applies. Conversely, where a taxpayer has been reckless in relation to the operation of a taxation law the guidelines indicate that it would be an exceptional case in which the remission discretion should be exercised in favour of the taxpayer.
The principal basis on which Cartesian relied to support remission of the administrative penalties was the contention advanced in its accountants’ letter of 6 November 2013. The substance of that contention was that the preponderance of the input tax credit claims were available to Equity 8 Pty Ltd and, as a consequence, the actual shortfall was, in practical terms, much less than the amount the Commissioner has assessed. The additional contention was that, if the GST group Cartesian initiated in 2011 had been in place by the end of December 2009 the actual shortfall would have been minimal.
The force of Cartesian’s contention depended, at the threshold, upon its ability to demonstrate that Equity 8 was in fact entitled to the input tax credit amount of $25,360 asserted in the 6 November 2013 letter. Cartesian’s accountants asserted that there were 22 tax invoices that supported the claim. In the end result these foreshadowed documents were not produced and Equity 8’s input tax credit amount entitlement was not established.
In any event, I do not accept that any entitlement of Equity 8 to input tax credits in the relevant period provides a sufficient basis for exercising the remission discretion in favour of Cartesian. I have set out earlier in these reasons a summary of the GST Act provisions relating to entitlement to input tax credits. That summary sufficiently reveals the formal requirements for entitlement, and demonstrates that both the possession of tax invoices, and the timing of payments for the acquisition of services (in the case of taxpayers who account on a cash basis) are critical to the taxpayer’s input tax credit entitlement in relation to any particular tax period. That criticality is an important aspect of the GST Act provisions. It would be wrong, in my view, to consider the favourable exercise of the remission discretion, by attaching significant weight to the proposition that, because of alternative entitlements attaching to other entities related to a taxpayer, the total overall GST liability, assessed at some later time, might reveal no overall ultimate tax shortfall amount.
I accept that a taxpayer’s overall good compliance history may provide a sufficient basis for the favourable exercise of that discretion. However, I do not consider that Cartesian has affirmatively established a good compliance history. And even if it should be assumed that it had such a history, I do not consider that such a history significantly favours Cartesian in relation to the penalties imposed on the shortfall resulting from the amended BAS submitted in December 2010. Those amended BAS were, to elaborate upon a concession guardedly made in Cartesian’s accountants letter of 6 November 2013, “ill advised” and, having regard to the findings I have made, generally and rather obviously, lacking any objective justification, having regard to the relevant GST Act provisions.
Decision
The penalty decision under review is set aside in relation to the June 2010 quarter. In relation to that quarter I vary the decision under review as follows:
(a)I assess the shortfall amount as $1,133.61 (ie $1,702 less $568.39); and
(b)I assess the penalty amount at $566.80 (ie 50% of the shortfall amount).
The penalty decision under review is otherwise affirmed.
57. I certify that the preceding 56 (fifty-six) paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member.
.........................[sgd]...............................................
Associate
Dated 31 January 2014
Dates of hearing 12 & 13 November 2013 Advocate for the Applicant Bentleys
Counsel for the Respondent Mr O’Mahoney Solicitors for the Respondent ATO Legal Services Branch
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Taxation and Revenue
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Entitlement to Input Tax Credits
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Administrative Penalty
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Calculation of Penalty
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Good Compliance History
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