Confidential and Commissioner of Taxation
[2013] AATA 624
[2013] AATA 624
Division
TAXATION APPEALS DIVISION
File Number(s)
2012/2949
Re
Confidential
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Mr F D O'Loughlin, Senior Member
Date 30 August 2013 Place Melbourne 1.The Tribunal sets aside the decision under review relating to penalties and in substitution decides that a penalty is imposed for failure to take reasonable care, without remission.
2.The Tribunal affirms the decision under review in all other respects.
............[sgd]............................................................
Mr F D O'Loughlin, Senior Member
TAXATION – Goods and Services Tax – Input tax credits – whether a supply was made – penalty – whether intentional disregard or failure to take reasonable care.
Legislation
A New Tax System (Goods and Services Tax) Act 1999 (C’th), sections 9-5, 11-5, 11-20, 40-5, 72-5, 72-10
A New Tax System (Goods and Services Tax) Regulations 1999 (C’th), regulation 40-5.09
Taxation Administration Act 1953 (C’th), Schedule 1, section 284-75, 298-20
Cases
McCormack v F. C. of T. (1979) 143 CLR 284
Butler v Commissioner of Taxation [2009] AATA 283
Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149
Davis v Federal Commissioner of Taxation (2000) 171 ALR 654
Imperial Bottleshops Pty Ltd v F.C. of T. (1991) 91 ATC 4546
Bayconnection Property Developments Pty Ltd v Commissioner of Taxation [2013] AATA 40
HP Mercantile Pty Limited v Commissioner of Taxation [2005] FCAFC 126
Weyers v F. C. of T. 2006 ATC 4523
Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50
Hutson v F. C. of T. 2009 ATC 10-099
REASONS FOR DECISION
Mr F D O'Loughlin, Senior Member
30 August 2013
1.The Applicant conducts a product development and commercialisation business. The Applicant contends that, pursuant to two agreements, it purchased intellectual property and debtors from related parties. The Applicant claimed ITCs[1] it contends it was entitled to pursuant to s 11-20 of the GST Act[2] consequent upon the two purchases. The Commissioner has denied any entitlement to those ITCs, resulting in a shortfall. The Commissioner has also levied an administrative penalty at the base rate of 75% of the shortfall amount for intentional disregard of the law.
[1]Input Tax Credits.
[2]A New Tax System (Goods and Services Tax) Act 1999 (C’th).
2.The Applicant’s disputed entitlements to ITCs relate to the purported purchase of intellectual property and other assets under:
(a)the IPL Agreement;[3] and
[3]The agreement dated 18 February 2011 between the Applicant and IPL.
(b)the SZ Agreement.[4]
[4]The agreement dated 25 March 2011 between the Applicant and DPL.
3.The SZ Agreement followed an earlier agreement between the same parties, that apart from the subject matter sold, the purchase price and dates etc, contained the same general terms.
The Legislative Framework
4.If an entity registered for GST makes a creditable acquisition it is entitled to the ITCs associated with the acquisition.[5] The GST Act provides that an entity makes a creditable acquisition if:
[5]GST Act, s 11-20.
(a)it acquires anything solely or partly for a creditable purpose;
(b)the supply of the thing to the entity was a taxable supply;
(c)the entity provided or was liable to provide consideration for the supply; and
(d)the entity was registered or required to be registered for GST.[6]
[6]GST Act, s 11-5.
The Contentions
5.The Commissioner contends that:
(a)the Applicant has the onus of proving that it made creditable acquisitions;[7]
[7]Within the meaning of the GST Act, s 11-5.
(b)in the absence of evidence, the Tribunal is not able to infer facts in favour of the Applicant;[8] and
[8]McCormack v F. C. of T. (1979) 143 CLR 284 at 303, 306 and 323.
(c)in circumstances where the Applicant seeks to rely on memory and a lack of records, the Tribunal should be reluctant to find that the Applicant’s onus has been discharged.[9]
[9] Butler v Commissioner of Taxation [2009] AATA 283.
6.The Commissioner submits that on the evidence led, the Tribunal cannot find that:
(a)some or all of the intellectual property sold existed;
(b)there were sale transactions;
(c)any or all of the consideration required to be paid under the IPL the SZ Agreements was paid; or
(d)there were taxable supplies.
7.The Commissioner contends that part of the acquisition under the IPL Agreement comprised financial supplies and therefore not taxable supplies and as such, no ITCs were available for that part.
8.The Applicant resists all of these contentions.
Facts and Evidence
9.The Applicant tendered:
(a)documentary and accounting material;
(b)a witness statement of Ms AB, who provided accounting services to the Applicant and its related companies; and
(c)a witness statement of Mr XY, who was the director of the Applicant and its related companies.
10.Each witness was extensively cross-examined in relation to the finer details of the businesses conducted by the Applicant and the intellectual property it owned and purported to purchase. In the context of the issues to be resolved, and the manner in which they are resolved below, it is not necessary to make findings concerning whether the intellectual property existed and whether what was purported to have been sold and purchased in the various agreements differed or was duplicated.
11.It is necessary to deal with those parts of the evidence concerning when sales were to be completed, the receivables that were purported to have been sold and the consideration said to have been paid. The evidence of the transactions occurring, and the terms on which they occurred, is limited. The Applicant relies on the IPL Agreement and the SZ Agreement documents, the tax invoices issued by the vendor in those agreements, and the witness statement and oral testimony of the Mr XY, to show that the acquisitions occurred.
The IPL Agreement
12.The payment terms of the IPL Agreement, and whether they were observed, are critical to the outcome. The IPL Agreement was prepared by Mr XY as a measure to save expenses. Mr XY is not a lawyer and does not have legal training. He adapted the terms of earlier agreements to which he had access. The IPL Agreement provided that:
(a)the assets were to be acquired under each agreement on completion;[10]
[10]Clause 2.1.
(b)title to the assets passed on completion;[11]
[11]Clause 2.2.
(c)the Applicant agreed to pay the purchase price to IPL upon completion;[12]
[12]Clause 3.1.
(d)the Applicant agreed to assume nominated liabilities at completion;[13]
[13]Clause 4.3(c)(ii).
(e)the Applicant’s obligations and IPL’s obligations were interdependent.[14] The terms of the operative clause were:
[14]Clause 5.1.
The obligations of the Purchaser and the Vendor at Completion are interdependent. All actions at Completion will be deemed to take place simultaneously and no delivery or payment will be deemed to have been made until all deliveries and those payments which must be made have been made.
13.The Schedule to the IPL Agreement shows:
·that the assets to be sold and the prices payable were:
(a)Debtors $501,288
(b)IP $380,000
A total of $881,288.00 which matched the purchase
price listed in clause 1.1 of that agreement.
·that the GST that would be payable was $88,065
·liabilities that were to be assumed that totalled $850,400
The tax invoice issued for this sale disclosed that:
(a)the purchase price for the assets to be sold was $881,288
(b)the applicable GST was $88,128
(c)and the aggregate purchase price was $969,416.
It is apparent that there is an immaterial reconciliation mismatch in the documentation.
The SZ Agreement
As is the case for the IPL Agreement, the payment terms of the SZ Agreement and whether they were observed are critical to the outcome in the present matter. This document was also prepared by Mr XY, for the same reasons as the IPL Agreement. Its general terms concerning completion and interdependence of obligations were the same as outlined above for the IPL Agreement.
The Schedule to the SZ Agreement was not in evidence. The tax invoice issued by DPL was. That document disclosed that:
(a)the assets to be sold were various IP and related items and the aggregate price payable (excluding GST) was $1,789,700;
(b)GST was $178,970; and
(c)the total payable was $1,968,670.
While there was an obligation on the Applicant to assume the liabilities stated,[15] these liabilities were not listed in the document in evidence.
[15]Clause 4.3(c)(ii).
Both Agreements
Mr XY’s evidence was that:
(a)he did not get the intellectual property that was sold valued for the purposes of both of these agreements;
(b)he valued the intellectual property at the amounts stated, based on his experience in the industry; and
(c)liabilities were assumed to effect payment of the purchase price.
The documents tendered and oral testimony do not establish that liabilities were assumed to the extent of the purchase prices payable under the IPL and SZ Agreements. Nor do they establish that cash was paid. The Applicant accepted in its submissions that the purchase prices were not paid in full and there was evidence that the liabilities alleged to have been assumed by the Applicant were paid by other parties. This evidence bears out in the Applicant’s admission in its submissions.
In relation to the evidence led, the Commissioner contends that:
(a)Mr XY’s self-serving statements are to be approached critically;[16]
(b)Mr XY’s evidence should be the subject of careful scrutiny;[17] and
(c)the caution referred to by Hill J in Imperial Bottleshops Pty Ltd v F.C. of T.[18] is particularly apt.
[16]Relying on Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149 at [82].
[17]Davis v Federal Commissioner of Taxation (2000) 171 ALR 654 at [47] per Hill J.
[18](1991) 91 ATC 4546 at 4552.
The Commissioner contends that the effect of the completion and interdependence of obligations clauses in the IPL and SZ Agreements was such that:
(a)the Applicant could not acquire the assets under either agreement until it had paid the purchase price in full;
(b)the agreements precluded the transfer of the assets until the purchase price had been paid in full;
(c)there is no evidence that the Applicant paid the purchase price under the agreements;
(d)the terms of each agreement[19] provide for the assumption of liabilities as a separate obligation to the payment of the purchase price. The agreements provide for the Applicant to pay the purchase price and assume the liabilities and both are required to complete the acquisition. Any contrary contention that an acquisition occurs on the assumption of liabilities contradicts the express terms of each agreement.
The terms of the IPL Agreement which are in evidence suggest that this is not the proper construction to be given. If it were, the Applicant would have committed to a purchase price and debt assumption obligations of $850,400 in excess of the value of assets acquired of $881,288. It is inconceivable that that would be so. The Applicant’s contention that the assumption of liabilities was part of the payment of purchase price must be accepted. The question remains whether the Applicant did so to the value of the purchase price. The Commissioner contends that, in any event, the Applicant has failed to demonstrate that it assumed any liabilities at all;
(e)there can be no creditable acquisition[20] until the purchase price under each agreement is paid by the Applicant; and
(f)the Applicant’s application for review must fail on that basis alone.
[19]Clause 4.3(c) of both agreements.
[20] Within the meaning of GST Act, s 11-5.
The Applicant contends that payment was made under the IPL and SZ Agreements when it assumed the liabilities of IPL and DPL.
The Applicant has expressly acknowledged that the SZ Agreement did not quantify or list the liabilities the Applicant was purportedly required to assume. When asked to provide a list of the creditors to whom the liabilities were owed by DPL, the Applicant answered “N/A”.
Beyond the assertion by the Applicant, the evidence that the Applicant provided consideration for the assets to be purchased under either agreement is limited. The evidence before the Tribunal does not disclose that the Applicant provided sufficient consideration by way of payment, or by way of debt assumption, to show that the purchase prices were paid in full. That fact of non-payment is consistent with DPL and IPL not initially recognising that taxable supplies had been made.[21]
[21]In Bayconnection Property Developments Pty Ltd v Commissioner of Taxation [2013] AATA 40, DP Frost and SM Lazanas noted at [79] – “ … it is surely a bold position for a taxpayer to take … to say that, as purported recipient, it can comfortably claim back from the Commissioner the GST amounts that the entity on the other side of the alleged transaction – controlled by the same family, and whose BASs were prepared by the very person who was lodging the ITC claims – did not pay to the Commissioner in the first place.”
As a consequence, there is limited and weak and insufficient evidence on which to base the Applicant’s claim that it made an acquisition under either Agreement.
The Commissioner contends that the:
[A]pplicant has failed to discharge even the most rudimentary step of proving it made a creditable acquisition because there is no evidence to indicate what was bought.
This contention cannot be accepted and warrants comment. The IPL Agreement and the SZ Agreement documents and the tax invoices were in the documents filed pursuant to s 37 of the AAT Act.[22] Section 37 of the AAT Act imposes an obligation on respondents to file documents with the Tribunal that are relevant to the decision under review and the Tribunal is entitled to have regard to those documents. Applicants are similarly entitled to rely on them, particularly when documents which are of their own making are provided to respondents and are subsequently lodged with the Tribunal.
Conclusions regarding whether creditable acquisitions were made
[22]Administrative Appeals Tribunal Act 1975 (C’th) (the AAT Act).
The evidence led does not establish that the Applicant had paid the purchase price under either of the Agreements in full. The lists of debts assumed in the documentary evidence before the Tribunal are inconclusive in determining whether the purchase prices were paid in full.
The consequence of this is that the evidence does not establish that the property to be sold passed from the vendors (IPL and DPL) to the Applicant in the relevant period, with the result that there were no supplies in that period and ITCs were not available.
Acquisitions of Financial Supplies
The Commissioner also contends that ITCs were not available to the extent claimed by the Applicant in respect of the IPL Agreement because that agreement provided for the sale and purchase of financial supplies. The Commissioner contends that the Applicant was not entitled to ITCs for that part of the GST amount of $88,128, referrable to the debtors.
Financial supplies are input taxed[23] and therefore not taxable supplies.[24]
[23]GST Act, s 40-5.
[24]Within the meaning of GST Act, s 9-5.
A debt or an interest in a debt is a financial supply.[25] As a consequence, the debtors contracted to be sold to the Applicant by IPL were financial supplies[26] and therefore input taxed supplies.
[25]See HP Mercantile Pty Limited v Commissioner of Taxation [2005] FCAFC 126 at [19], GST Act s 40-5(2) and A New Tax System (Goods and Services Tax) Regulations 1999 (C’th), regulation 40-5.09(1), (3) Table item 2, and (4)
[26]Within the meaning of GST Act, s 40-5(1).
Accordingly, any supply of debtors under the IPL Agreement was neither a taxable supply nor a creditable acquisition.[27]
[27]GST Act, s 11-5(b).
As a consequence, the Applicant was not entitled to claim ITCs for the portion of the acquisition under the IPL Agreement that related to the acquisition of IPL’s debtors.
GST Act, Division 72
The Applicant also contends that Division 72 of the GST Act applies to the extent that the Applicant paid no consideration, relying on s 72-10. Section 72-10(1) of the GST Act provides:
If a supply to your associate without consideration is a taxable supply, its value is the GST exclusive market value of the supply.
Division 72 of the GST Act does not apply in the present circumstances because the Applicant does not satisfy the conditions under s 72-5 of the GST Act,[28] which provides an exception to the principle under s 9-5(a) of the GST Act. The Applicant was registered for GST and claimed ITCs for the purchases, asserting they were for a creditable purpose, which, if they were made, would undoubtedly be the case. Therefore, s 72-10 does not apply to the Applicant.
[28]GST Act, s 72-5 provides:
The fact that a supply to your associate is without consideration, does not stop the supply being a taxable supply if:
(a) your associate is not registered or required to be registered; or
(b) your associate acquires the thing supplied otherwise than solely for a creditable purpose.
…
Penalty
The Administration Act[29] creates a penalty regime for false or misleading statements that leads to a shortfall amount.
[29]Taxation Administration Act 1953 (C’th).
The consequence of the Tribunal’s findings is that the Applicant has made a false statement by claiming ITCs to which it was not entitled. It is therefore potentially liable to a penalty.[30]
[30]Administration Act, Schedule 1, s 284-75(1).
The Commissioner applied a shortfall penalty of 75%, contending that the shortfall amount resulted from Applicant’s intentional disregard of the law. In support of this conclusion, the Commissioner contends that:
(a)“intentional” means that something more than reckless disregard or indifference of a taxation law is required;
(b)unlike the objective test, which applies to determine whether there has been a want of reasonable care or recklessness, the test for intentional disregard is purely subjective in nature and the actual intentions of the entity are a critical element;
(c)there must be actual knowledge that the statement made is false;
(d)to establish intentional disregard, the entity must understand the effect of the relevant legislation and how it operates in respect of the entity’s affairs and must have made a deliberate choice to ignore the law;
(e)dishonesty is a requisite feature of behaviour that shows an intentional disregard for the operation of the law;
(f)evidence of intention must be found through direct evidence or by inference from all the surrounding circumstances,[31] including the conduct of the entity; and
(g)all of the above is demonstrated in the present circumstances.
[31]Weyers v F. C. of T. 2006 ATC 4523.
The Commissioner points to the Applicant maintaining that each transaction occurred without, he contends, any basis on which they could have occurred and argues that, in the circumstances, there is no other plausible explanation other than that the Applicant’s conduct constituted intentional disregard. The Commissioner also identified in his objection decision that:
(a)the Applicant had entered into an earlier Agreement with DPL;
(b)the Applicant had claimed ITCs in relation to that earlier agreement;
(c)the Applicant had been told by the Commissioner that the ITCs claimed were not allowable; and
(d)all of this occurred before the offending BAS[32] was lodged.
[32]Business Activity Statement.
The Commissioner did not press the earlier agreement and earlier shortfall amount before the Tribunal.
The Commissioner submitted that the only reasonable inference that may be drawn from the facts and surrounding circumstances is that the Applicant knew it had not made the acquisitions and yet proceeded with claiming the ITCs; and thus intentionally disregarded its obligations.
As a consequence, the Commissioner argued, the Applicant has failed to prove that its conduct constituted anything other than intentional disregard.
The Applicant disputed these contentions. It was apparent that the Applicant was of the belief that the transactions had occurred, that the Applicant had (potentially inadvisably) created transaction documents without understanding their effect and had acted in ignorance.
Intentional disregard is not the appropriate standard in these circumstances. Either failure to take reasonable care or recklessness would be a more appropriate characterisation of the Applicant’s conduct. What can be pointed to is either the Applicant’s failure to get appropriate advice, its naivety in preparing its own agreements in relation to large value transactions without appreciating their appropriateness in the circumstances and relying on a tax agent.
The fact of engaging a tax agent is a plus.
It may be seen to be ironic to observe that the Applicant’s submissions at the hearing were to the effect that it accepted not all of the consideration had been paid, but that property in the intellectual property nevertheless passed under the IPL and SZ Agreements and that there were in fact supplies. To the extent the Applicant, acting without the benefit of a legal adviser, made a mistake in preparing and lodging its BAS, that mistake was shared in the submissions it made to the Tribunal made with that assistance. The Applicant also submitted that if there was any culpability, that culpability constituted lack of reasonable care. The Applicant’s submissions were genuinely made and demonstrate the mistaken, as opposed to reckless or worse, foundation upon which they proceeded. Failure to take reasonable care is the appropriate level of culpability.
Penalty remission
The Commissioner and the Tribunal on review have a discretion to remit penalties.[33] The Administration Act does not set out any guidelines for exercising that discretion. The issue is simply whether it is appropriate in the circumstances to remit penalties in whole or in part.
[33]Administration Act Schedule , s 298-20.
A significant consideration in the exercise of this discretion is whether, having regard to the particular circumstances of the taxpayer, the outcome would otherwise be harsh or produce an unjust, inappropriate or unreasonable outcome.[34]
[34]Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50 at [248]-[249] Griffiths J with whom Edmonds J agreed.
The Commissioner contends that it will be a rare case in which the discretion to remit is exercised in the face of a penalty that arises in circumstances of intentional disregard or recklessness,[35] and that there is insufficient material for the Tribunal to justify remission of the penalties in this matter. The Commissioner made no submission tied to failure to take reasonable care.
[35]Referring to Hutson v F. C. of T. 2009 ATC 10-099 at [124].
The amounts claimed were large; they arose in related-party transactions where there was not a corresponding taxable supply reported.
The penalty levied does not produce an inappropriate result.
Decision
The Tribunal sets aside the decision under review relating to penalties and in substitution decides that a penalty is imposed for failure to take reasonable care, without remission.
The Tribunal affirms the decision under review in all other respects.
I certify that the preceding 55 (fifty-five) paragraphs are a true copy of the reasons for the decision herein of Mr F D O’Loughlin, Senior Member. ............[sgd]..........................................
S Herath, Associate
Dated 30 August 2013
Date(s) of hearing 9 and 10 April 2013 Date final submissions received 18 April 2013 Solicitors for the Applicant Mr Arthur Athanasiou, Thomsons Lawyers Counsel for the Respondent Mr Nigel Evans Solicitors for the Respondent Mr Nicholas Kennedy, Australian Taxation Office Legal Services Branch
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