Confidential and Commissioner of Taxation
[2014] AATA 257
[2014] AATA 257
Division TAXATION APPEALS DIVISION File Number
2013/2763
Re
Confidential
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal F J Alpins, Deputy President
Date 30 April 2014 Place Melbourne The Tribunal affirms the decision under review, being the Commissioner’s decision made on 2 May 2013 to disallow the applicant’s objection to the penalty assessment issued on 5 February 2013. As the Tribunal does not otherwise have jurisdiction to consider the application for review, the application is otherwise dismissed.
..........................[sgd]..............................................
F J Alpins, Deputy President
TAXATION – Practice and procedure – jurisdiction of Tribunal – Pt IVC of Taxation Administration Act 1953 – decision regarding PAYG withholding credits - not subject of reviewable decision - administrative penalties – false or misleading statement – whether shortfall amount resulted from recklessness by applicant – whether remission of penalty warranted
Legislation
Administrative Appeals Tribunal Act 1975 (Cth) sections 25(1), 25(4)
Income Tax Assessment Act 1936 (Cth) sections 6, 166, 167, 175A(1)
Taxation Administration Act 1953 (Cth) sections 8AAZA, 14ZL-14ZZS
Taxation Administration Act 1953 (Cth), ss 12-35, 16-5, 16-70, 16-150, 16-155, 18-15, 284-75, 284-80, 284-85, 284-90, 298-20 Sch 1
Cases
BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347
Commissioner of Taxation v Ryan (1998) 82 FCR 345
Constantinidis v Federal Commissioner of Taxation (2004) 55 ATR 348
David Cassaniti v Commissioner of Taxation [2010] FCA 641
Fox v Percy (2003) 214 CLR 118
Hart v Commissioner of Taxation (2003) 131 FCR 203
Howard v Commissioner of Taxation (2012) 206 FCR 329
Commissioner of Taxation v R & D Holdings (2007) 160 FCR 248
Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50
Sent v Commissioner of Taxation [2012] FCA 382
REASONS FOR DECISION
F J Alpins, Deputy President
30 April 2014
INTRODUCTION
This application for review concerns the applicant’s taxation affairs for the financial year ended 30 June 2012 (the “relevant year”). Particularly, it concerns the applicant’s entitlement pursuant to s 18-15 of Sch 1 to the Taxation Administration Act 1953 (Cth) (the “TAA”) to a credit equal to the total of the amounts said to have been withheld from withholding payments (being salary or wages) said to have been made to the applicant during the relevant year. Furthermore, it concerns a related penalty assessment issued to the applicant in respect of his claiming of such a credit in his income tax return for that year.
BACKGROUND & PROCEDURAL HISTORY
From May 2005 until June 2012, the applicant was the sole director and secretary of a company I shall refer to as “Blue Pty Ltd”. That company was placed into liquidation on 28 June 2012. On 17 August that year, the applicant lodged his individual tax return for the relevant year. In his tax return, prepared by his accountant (also the company’s accountant during the relevant year), the applicant disclosed taxable income in the form of salary or wages paid to him by Blue Pty Ltd in the amount of $297,000. He also claimed a “Pay As You Go” (“PAYG”) withholding credit for amounts withheld from payments of his salary or wages, in the amount of $123,024.
The Commissioner conducted a review of the applicant’s income tax return. In correspondence concerning the outcome of that review, it was noted that the applicant had failed to provide a payment summary, bank statements or payslips showing deposits of payments received by him from Blue Pty Ltd.
Consequently, it was noted in the applicant’s notice of assessment for the relevant year (the “primary assessment”) that an “adjustment[...] ha[s] been made to your assessment”, being that that the PAYG withholding credit claimed in his income tax return had not been allowed. The notice of assessment also referred to a statement of account, although that document did not appear to be before the Tribunal.
The Commissioner also assessed the applicant as liable to pay an administrative penalty in the amount of $61,511.95, being 50% of the claimed PAYG withholding credit, on the basis that he had, by claiming that credit, made a false or misleading statement for the purposes of s 284-75(1) of Sch 1 to the TAA and that he had a shortfall amount as a result of that statement which resulted from recklessness as to the operation of a taxation law (ss 284-80, 284-85 and 284-90 in Sch 1 to the TAA). The notice of assessment and notice of penalty assessment were both issued on 5 February 2013. The Commissioner also issued an adjusted income tax return of the applicant for the relevant year, reflecting the adjustment of total tax withheld from the applicant’s salary or wages to nil.
The applicant purported to object to the primary assessment on the basis that he was entitled to the PAYG withholding credit in issue. He also objected to the penalty assessment. A PAYG payment summary (see s 16-155(1)(a) of Sch 1 to the TAA) for the 2012 income year was attached to the objection form lodged on his behalf. The payment summary accorded with the applicant’s income tax return for that year – it stated that Blue Pty Ltd, as trustee for a trust, had made total withholding payments to the applicant in the amount of $297,000 and that the total of the amounts it had withheld from those payments was $123,024. The payment summary was signed by the liquidator of Blue Pty Ltd and dated 20 February 2013.
By letter dated 2 May 2013, the Commissioner informed the applicant that he had decided to disallow the applicant’s objection. The Commissioner stated that the applicant could not in fact object to the adjustment of the PAYG withholding credit claimed in his income tax return for the relevant year, but that the Commissioner had conducted a review regarding the applicant’s claim for the credit.
I note that in the accompanying reasons for the decision, the Commissioner said that the objection raised questions including the question of whether the Commissioner would “include PAYG withholding credits of $123,024 in [the applicant’s] ... 2012 income tax return”, which he answered negatively. He stated that in light of the applicant’s objection he had conducted a review of the decision to adjust the amount of the PAYG withholding credit to nil and that that decision would remain unchanged.
LEGISLATION – PAYG WITHHOLDING
The provisions governing PAYG withholding are contained in Pt 2-5 of Sch 1 to the TAA. Section 12-35 of Sch 1 (which is contained in Div 12 of Pt 2-5) provides:
“An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).”
The amount to be withheld from a withholding payment is to be worked out under the withholding schedules made under s 15-25 of Sch 1 (s 15-10).
Section 16-5 of Sch 1 provides that an entity required to withhold under Div 12 must do so when making the payment. An entity that withholds an amount as required by Div 12 is discharged from all liability to pay or account for that amount to any entity except the Commissioner (s 16-20 of Sch 1). An entity that withholds such an amount must pay the amount to the Commissioner in accordance with Subdivision 16B (s 16-70(1) of Sch 1).
Section 18-15 of Sch 1 to the TAA relevantly provides:
“18-15 Tax credit for recipient of withholding payments
(1)An entity is entitled to a credit equal to the total of the amounts withheld from withholding payments made to the entity during an income year if an assessment has been made of the income tax payable, or an assessment has been made that no income tax is payable, by the entity for the income year.”
An entity is defined, amongst other things, to include a person (see s 8AAZA of the TAA).
CONSIDERATION
Withholding credits – Tribunal’s jurisdiction
The Commissioner submitted that the Tribunal lacks jurisdiction to review his decision concerning the applicant’s entitlement to the PAYG withholding credit in issue. I accept that submission.
The Tribunal only has the jurisdiction conferred upon it by enabling enactments (see ss 25(1) and 25(4) of the Administrative Appeals Tribunal Act 1975 (Cth)). In my view, that decision is not capable of review because it does not form part of the “objection decision” made by the Commissioner for the purposes of Pt IVC (ss 14ZL-14ZZS) of the TAA, nor does it constitute such a decision in itself.
Section 175A(1) of the Income Tax Assessment Act 1936 (“ITAA 1936”) provides:
“A taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953”.
Section 14ZL of the TAA provides:
“(1) This Part applies if a provision of an Act or of regulations (including the provision as applied by another Act) provides that a person who is dissatisfied with an assessment, determination, notice or decision .... may object against it in the manner set out in this Part.
(2) Such an objection is in this Part called a ‘taxation objection’.”
Division 3 of Pt IVC contains provisions concerning taxation objections, including how and when they are to be made (see ss 14ZU and 14ZW respectively). Section 14ZY relevantly provides that, if the taxation objection has been lodged within the required period, the Commissioner must decide whether to allow it, wholly or in part, or to disallow it. Such a decision is called an “objection decision” (s 14ZY(2)). Section 14ZZ(1)(a)(i) relevantly entitles a person dissatisfied with the Commissioner’s objection decision to apply to the Tribunal for review of the decision. (I note that the objection decision must be a “reviewable objection decision”, but that term is not significant in this instance (see definition in s 14ZQ)).
As I have said, the applicant purported to object both to the primary assessment (with respect to the PAYG withholding credit) and the related penalty assessment. The question in this case is whether the applicant’s objection constitutes a “taxation objection” in so far as it purports to be an objection to the primary assessment.
The Commissioner was obliged to make an assessment under ss 166 or 167 of the ITAA 1936. An assessment is relevantly defined as “the ascertainment of ... the amount of taxable income ... and of the tax payable on that taxable income” (s 6 of the ITAA 1936; see also s 166). Withholding under the PAYG regime therefore does not form part of the assessment process (David Cassaniti v Commissioner of Taxation [2010] FCA 641 at [174] per Edmonds J, citing with approval Constantinidis v Federal Commissioner of Taxation (2004) 55 ATR 348 at [72] per Hill J). A credit for PAYG withholding which appears on a notice of assessment arises only by reason of the operation of s 18-15(1) of Sch 1 to the TAA and is not a particular of the assessment but rather a particular of the statement of account between the taxpayer and the Commissioner (Cassaniti at [174]-[175], citing with approval Commissioner of Taxation v Ryan (1998) 82 FCR 345 at 363-364 per Merkel J (with whom Burchett and French JJ agreed)).
Accordingly, the exclusion of a credit claimed in the applicant’s income tax return from his primary assessment, although described in the notice of assessment as an “adjustment” to the applicant’s “assessment”, did not in fact constitute a particular of the assessment but rather a particular of the statement of account between the applicant and the Commissioner (see Cassaniti at [175]). (It therefore seems to me that, for present purposes, the primary assessment therefore constituted an assessment made under s 166 of the ITAA 1936 rather than a default assessment made under s 167.)
It follows that a taxpayer cannot properly object to an assessment on grounds concerning entitlement to PAYG withholding credits. Such a claim does not constitute dissatisfaction with an “assessment” for the purposes of s 175A(1) of the ITAA 1936. To the extent that the applicant’s objection purports to be against the primary assessment, it does not form part of nor constitute a “taxation objection” within the terms of s 14ZL of the TAA. The applicant’s objection was only properly made against the penalty assessment.
Accordingly, I consider that the Commissioner’s decision upon review that the applicant is not entitled to the claimed PAYG withholding credit did not form part of the “objection decision” within the terms of Pt IVC, nor constitute an objection decision in itself. The Commissioner’s decision with respect to the PAYG withholding credit is not capable of review by the Tribunal.
The “objection decision” made by the Commissioner for the purposes of Pt IVC of the TAA was his decision to disallow the applicant’s objection to the penalty assessment, and it is only that decision that is capable of review by the Tribunal. I note in passing that it was presumably for that reason that entitlement to such credits was the subject of an application for declaratory relief rather than an appeal brought under Pt IVC in the Federal Court in Cassaniti.
However, the issue of the applicant’s entitlement to the PAYG withholding credit nevertheless arises in the context of the penalty assessment, as I explain later in these reasons.
Penalty
Section 284-75(1) of Sch 1 to the TAA relevantly provides:
“You are liable to an administrative penalty if:
(a)you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law .... ; and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.”
The gist of the applicant’s case at the commencement of the hearing was that Blue Pty Ltd had in fact withheld amounts from his salary or wages as required under Div 12 of Pt 2-5 of Sch 1, the total of the amounts withheld being $123,024 as claimed, and that he had not received the gross amount due to him. He conceded at the outset that Blue Pty Ltd had not paid any such withheld amounts to the Commissioner as required by Subdivision 16B.
The applicant gave oral evidence and was cross-examined. The documentary evidence upon which the applicant relied to demonstrate that the amounts in question had been withheld was the payment summary prepared by the liquidator of Blue Pty Ltd. He asserted in his oral evidence that there was other evidence supporting that contention, particularly MYOB records, but no such evidence was tendered before the Tribunal.
The applicant bears the onus of proving that the penalty assessment is excessive (s 14ZZK of the TAA; see Hart v Commissioner of Taxation (2003) 131 FCR 203 at [38], cited with approval in Sent v Commissioner of Taxation [2012] FCA 382 at [159]).
I have first considered the question of whether the applicant has succeeded in establishing that he is not liable in the first instance to a penalty pursuant to s 284-75 because the statement in his income tax return for the relevant year that he was entitled to the PAYG withholding credit in issue was in fact correct and therefore not false or misleading (see Hart at [38]). It is in this way that the issue of the applicant’s entitlement to the credit nevertheless arises for the Tribunal’s consideration, although the applicant’s evidence given under cross-examination ultimately disposed of the issue.
In Cassaniti (at [161]-[174]), Edmonds J addressed the issue of what the term “withholding” means in its statutory context and the evidence by which it may be inferred that a withholding, which involves “the holding back of something due to the employee, resulting in the reduction of a gross amount to a net amount which is paid to the employee” (at [163]), has occurred:
“There must be a process by which this withholding takes place. It may be reflected in actual funds held by the payer on behalf of the employee pending payment to the Commissioner; on the other hand, and more usually, it may only be reflected in the wage records and books of account of the payer as an accounting entry.
....
Where in the usual case the withholding process is represented only by accounting entries the question whether a legitimate process of withholding has ensued with depend upon a close examination of those books and records and the surrounding circumstances to see whether it may be inferred from those records and circumstances that a withholding has occurred. At one end of the spectrum, a mere journal entry in the absence of other evidence may not be sufficient evidence, having regard to the surrounding circumstances, that there has been a payment of salary and wages and a withholding from that payment. ...
...
Where there is controversy about the occurrence of a withholding the surrounding circumstances may either support or detract from the drawing of an inference that a withholding was in fact made. There are a number of reporting requirements where an employer makes a PAYG withholding.”
(At [163], [165], [167].)
In this case, there was no documentary evidence before the Tribunal in the form of books and records containing accounting entries made contemporaneously with the making of payments by Blue Pty Ltd to the applicant.
Furthermore, save for the payment summary prepared by the liquidator, which I shall address shortly, there was no evidence reflecting compliance by Blue Pty Ltd with its reporting requirements of the kind envisaged by Edmonds J in Cassaniti. For instance, there was no evidence that Blue Pty Ltd had notified the Commissioner at any stage of amounts it required to pay to the Commissioner under s 16-70(1) of Sch 1 (see (s 16-150 of Sch 1)). In fact, there was no evidence that Blue Pty Ltd had ever lodged a tax return.Furthermore, as the applicant conceded under cross-examination, Blue Pty Ltd, although registered for GST, had not lodged any BAS since 2009.
As for the payment summary upon which the applicant relied, I give little if any weight to that document. I note that the payment summary was not brought into existence by Blue Pty Ltd in compliance with its reporting requirements (under s 16-155(1)(a) of Sch 1) but rather upon the company being placed in liquidation and after the assessments were made. I infer from the contemporaneous documentary evidence, particularly email correspondence sent by the liquidator to the applicant on 20 Feb 2013 seeking confirmation of the figures which appeared in the payment summary (signed that same day), that the applicant provided the figures upon which the liquidator relied. I do not accept the applicant’s implausible attempts under cross-examination to explain away the significance of that correspondence, particularly his assertion that the liquidator was merely confirming what information he had previously provided to the applicant. In the absence of evidence establishing a process of withholdings, I can only infer that the figures provided by the applicant to the liquidator were not reliable and therefore that the payment summary is similarly unreliable.
I should say that I have not found it necessary in this case to make any findings as to the credit of the applicant, given that it is appropriate and sufficient in this case to proceed without resort to such findings (see Fox v Percy (2003) 214 CLR 118 at [31]; Cassaniti at [186]). However, if it were necessary to do so, it suffices to say that I would make adverse findings with respect to the applicant’s credit, as his demeanour and his evidence were notably unimpressive.
On the basis of the documentary evidence before the Tribunal, I am not satisfied that any amounts referable to the PAYG withholding credit claimed by the applicant were in fact withheld. In any event, the simple answer is that the applicant ultimately conceded under cross-examination that no such withholding had in fact occurred.
I note at this stage that the applicant also conceded that no withholding by Blue Pty Ltd of withholding payments made to him had in fact occurred during the two previous income years, being those ending 30 June 2010 and 30 June 2011. Nevertheless, he had claimed PAYG withholding credits in both those years (in the amount of $74,672 and $73,424 respectively) and as a consequence had received refunds ($10,938 and $11,021 respectively).
A withholding cannot be taken to have been made by virtue of the mere liability of an entity to withhold – the applicant could only be entitled to a credit to the extent of amounts actually withheld by Blue Pty Ltd (Cassaniti at [173]). If no amount was withheld then there will be no entitlement to a credit amount (ibid at [37]). Much of the applicant’s oral evidence focussed upon convoluted explanations of why Blue Pty Ltd did not have money available to remit to the Commissioner, which in essence he blamed upon another company said to owe money (described as the “big cheque”) to Blue Pty Ltd. I note that the applicant was also sole director of that company at the relevant time, yet he nevertheless sought to characterise the events as if he lacked any control over them. The Commissioner submitted that there was a lack of evidence that those amounts had not been paid to Blue Pty Ltd. The applicant also focussed on seeking to establish that he did not in fact receive the gross amount due to him. I note that, as the Commissioner submitted, one difficulty with that contention was that the evidence (particularly bank statements of Blue Pty Ltd and the applicant’s oral evidence) gave rise to the inference that the applicant treated the funds of Blue Pty Ltd as his own and so the amounts paid into the applicant’s bank account as wages could not be accepted as conclusive proof of the amounts the applicant had in fact received.
However, it is unnecessary for me to address these submissions. Remission of withheld amounts will serve to demonstrate that withholding has occurred (Cassaniti at [164]), while receipt of a gross amount will preclude entitlement to a withholding credit (ibid at [163]). However, as was made clear by Edmonds J in Cassaniti, the real question is whether the amounts in question have actually been withheld and, for the above reasons, I am satisfied that in this case they were not.
It follows that, in my view, the applicant has failed to establish that he is not liable in the first instance to a penalty under s 284-75(1) of Sch 1 to the TAA. I find that the applicant’s income tax return for the relevant year constituted a false or misleading statement within the terms of s 284-75(1)(b). (I note that it is immaterial in that regard that the tax return was prepared by the applicant’s accountant (s 284-25).) The “material particular” is the inclusion of the amount of tax said to have been withheld, which is material because it results in a “shortfall amount” for the purposes of s 284-80(1) of Sch 1, being an amount that the Commissioner must credit to the applicant worked out on the basis of the statement being more than it would otherwise be (Item 2).
I turn now to the question of whether the applicant has proven (on the balance of probabilities) that the penalty assessment is nevertheless excessive on the basis that the shortfall amount did not result from recklessness by him or his agent as to the operation of the TAA (see Sent at [161]). It would suffice to point to the failure by the applicant to discharge the onus with respect to the conduct of his agent (ibid), who did not give evidence, but I shall nevertheless address the applicant’s conduct.
In Hart, Hill and Hely JJ cited with approval the following passage from the judgment of Cooper J in BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347 at 364:
“Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.”
“Recklessness” has therefore been described, in the context of s 284-90(1), as involving an objective test but with subjective elements, being knowledge that there is a real as opposed to a fanciful risk that the statement may be incorrect or gross indifference as to its correctness (Howard v Commissioner of Taxation (2012) 206 FCR 329 at [56]; see also Commissioner of Taxation v R & D Holdings (2007) 160 FCR 248 at [70], [109]).
Given the evidence before the Tribunal, I am not satisfied on the balance of probabilities that the applicant was not reckless in the sense described in BRK. The applicant was the sole director of Blue Pty Ltd. In oral evidence, he described himself as the company’s managing director. As he conceded under cross-examination, he therefore knew that Blue Pty Ltd had not actually withheld any amounts from payments made to him during the relevant year. I infer particularly from that evidence, and also from the absence of contemporaneous documentary evidence such as books and records or other documents produced for reporting requirements serving to establish that withholding had occurred that, at the very least, the applicant was reckless - he knew that there was a real, as opposed to a fanciful, risk that the contents of his income tax return for the relevant year (particularly the claimed tax withheld) may be incorrect (given that he knew that the contents were in fact incorrect) and I find that his conduct amounted at least to “gross carelessness” of the kind described in BRK.
I note that I have taken into account brief oral evidence given by the applicant that at some stage in 2013 he was given advice by various people, including apparently a lawyer and various accountants, to the effect he was entitled to the withholding credit. That evidence does not assist the applicant. First, it was, according to him, obtained after the Commissioner made his objection decision and therefore after the relevant time, being when his income tax return was lodged. Furthermore, I would have placed little if any weight on that evidence even if it had been obtained earlier. Leaving aside the fact that the evidence was extremely vague and unsupported by any documentary evidence, it could only have been predicated on the false assumption that the amounts in question had actually been withheld. As I have said, the applicant eventually conceded that they had not.
It is therefore unnecessary for me to consider whether the shortfall amount results from a failure by the applicant to take reasonable care (see s 284-90(2)). Furthermore, the applicant has failed to prove that the exceptions to liability under s 284-75 (ss 284-75(5) and 284-75(6)) are satisfied in this case.
Section 298-20(1) in Sch 1 to the TAA provides that the Commissioner may remit all or a part of the penalty. I am not satisfied, having regard to the applicant’s particular circumstances, that it is appropriate to remit all or any part of the penalty under s 298-20 (see Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50 at [249] per Griffiths J (Edmonds J agreeing). There are no circumstances warranting remission in this case.
CONCLUSION
For the above reasons, the Tribunal will affirm the decision under review, being the Commissioner’s decision made on 2 May 2013 to disallow the applicant’s objection to the penalty assessment issued on 5 February 2013. As the Tribunal otherwise lacks jurisdiction to consider the application for review, the application will otherwise be dismissed.
I certify that the preceding 47 (forty-seven) paragraphs are a true copy of the reasons for the decision herein of F J Alpins, Deputy President. .........[sgd]...............................................................
Associate
Dated 30 April 2014
Date of hearing 16 December 2013 Date final submissions received 17 February 2014 Representative for the Applicant Self Counsel for the Respondent Mr H Forrester Solicitors for the Respondent Mr E Yiu and Ms J Chan, ATO Legal Services Branch
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