Dejesus v Chief Commissioner of State Revenue

[2009] NSWADT 176

CITATION:	Dejesus and anor v Chief Commissioner of State Revenue [2009] NSWADT 176
DIVISION:	Revenue Division
PARTIES:	APPLICANTS John Paul Dejesus Katrina Yaghoub RESPONDENT Chief Commissioner of State Revenue
FILE NUMBER:	086129
HEARING DATES:	12 June 2009
DATE OF DECISION:	8 July 2009
BEFORE:	Verick A - Judicial Member
CATCHWORDS:	First Home Owner Grant
LEGISLATION CITED:	First Home Owner Grant Act 2000 Duties Act 1997 Taxation Administration Act 1996 State Revenue Legislation Further Amendment Act 2005
CASES CITED:	Giris v Federal Commissioner of Taxation (1969) 119 CLR 365 K&S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd (1985) 60 ALR 509 CIC Insurance Limited v Bankstown Football Club Limited (1995) 187 CLR 384 Deputy Commissioner of Taxation v Clark [2003] NSWCA 91 Chief Commissioner of State Revenue v Pacific General Securities Ltd & Finmore Holdings Pty Ltd (No 2) (RD) [2005] NSWADTAP 54 Federal Commissioner of Taxation v Swift (1986) 18 ALD 679 Chief Commissioner of State Revenue v Incise Technologies Pty Ltd [2004] NSWADTAP 19 Trust Co of Australia v Chief Commissioner of State Revenue [2002] NSWADT 21 Philpott v Chief Commissioner of State Revenue (RD) [2008] NSWADTAP 18 Knight and Anor v Chief Commissioner of State Revenue [2008] NSWADT 83
REPRESENTATION:	APPLICANT In person RESPONDENT A Gerard, solicitor
ORDERS:	The decisions under review are affirmed

Introduction

1 The applicants seek the review of a decision of the respondent requiring the applicants to repay a First Home Owner Grant of $7,000 paid to the applicants on 26 November 2004 pursuant to the First Home Owner Grant Act 2000 (“the FHOG Act”), together with a penalty of 20% ($1,400).

2 The applicants also seek the review of a decision of the respondent to revoke the duty exemption granted to the applicants in accordance with the First Home Plus Concession Scheme (“FHP Concession”) under the Duties Act 1977 (“the Duties Act”) and requiring the applicants to pay the respondent:

(i) transfer duty of $14,212 with interest ($4,160.84) and

(ii) mortgage duty of $1,499.00 with interest ($438.34).

3 The grant under the FHOG Act and the FHP Concession under the Duties Act relate to the purchase by the applicants of a property situated at Plumpton, New South Wales (“the property”).

4 The respondent made these decisions on the basis that the applicants failed to comply with the “residence requirement” under s 12(1) of the FHOG Act and s 76(1) of the Duties Act to occupy the property as their principal place of residence for a continuous period of at least 6 months starting within 12 months after completion of the agreement to purchase the property.

5 The main issue in dispute is whether the applicants are entitled to an exemption from the “residence requirement” under s 12(1A)(b) of the FHOG Act and s 76(2)(b) of the Duties Act. The application also concerns two minor questions as to the liability of the applicants to a penalty under the FHOG Act and interest under the Taxation Administration Act 1996 (“the TA Act”).

Factual Background

6 The facts relating to the property were not in dispute and were as follows:

(1) Sometime in May 2003, the applicants paid a deposit of $20,000 to secure the purchase of the property “off the plan”.

(2) On 20 August 2003, the applicants exchanged contracts for the purchase of the property for the sum of $432,000.

(3) On 7 July 2004, the applicants and the vendor of the property executed a “Deed of Recision and Release” which effectively rescinded the 20 August 2003 contract. However, the Deed made provision in clause 5 to allow the parties to enter into a new Contract to purchase the property for $432,000 and on 7 July 2004, the applicants and the vendor executed the new agreement for the sale of the property. The new agreement was necessary because the original agreement did not include the installation of certain additional items.

(4) Settlement of the purchase occurred on 12 July 2004.

(5) On 25 June 2004, the applicants executed an “Exclusive Managing Agency Agreement (Residential)” with Edwards Kersten Real Estate Pty Ltd trading as “Starr Partners” in respect of the property and on 18 August 2004, the applicants entered into a fixed term “Residential Tenancy Agreement”, as landlords, with two tenants in respect of the property. The term of the tenancy was fifty-two weeks beginning on 19 August 2004 and ending on 18 August 2005 at a weekly rental of $290.

(6) The applicants made an application under the FHOG Act for a grant on 5 November 2004 in which they indicated that their “intention” was to commence to occupy the property on “25 December 2004”.

(7) The tenants continued to rent and reside in the property until on or about 1 June 2006.

(8) On 17 November 2006, the property was sold for $360,000.

7 Other facts relevant to this application were as follows:

(1) In 2002 the first applicant employed as a steel fixer in the construction industry, had a back injury at work, had to undergo an operation as a result and was off work for nearly a year.

(2) At Easter in 2002, the second applicant lost her younger brother, aged 26, in a car accident.

(3) The second applicant had her first child on 28 May 2004.

(4) In May 2004, the first applicant commenced to work, after recovering from his back injury, as a truck driver.

(5) In December 2004, the second applicant’s brother became hospitalised and remained in hospital for ten months.

(6) On 21 October 2005, the applicants exchanged contracts for the purchase of a second property located at Ermington, New South Wales for $535,000. Settlement of the purchase of the second property occurred on 19 December 2005.

Relevant Legislative Provisions

FHOG ACT

8 Historically, the FHOG Act was introduced to encourage and assist home ownership and to offset the effect of the Goods and Services Tax on the acquisition of a first home. The scheme has been continued to assist first home buyers to purchase or build their first homes.

9 The entitlement requirements for a grant are set out in s 7 (1) of the FHOG Act as follows:

“A first home owner grant is payable on an application under this Act if:
(a) the applicant or, if there are 2 or more of them, each of the applicants complies with the eligibility criteria, and

(b) the transaction for which the grant is sought:

(i) is an eligible transaction, and

(ii) has been completed.”

10 In the applicants’ case, the “eligible transaction” was the contract for the purchase of the Property in terms of s 13(1)(a) and was completed under s 13(5)(a) of the FHOG Act when the applicants were entitled on 12 July 2004 to possession of the Property.

11 The eligibility criteria is set out in Division 2 of Part 2 of the FHOG Act, which requires an applicant to satisfy 5 “Eligibility Criteria” to obtain a grant.

12 For the present purposes, the relevant eligibility criterion at issue is the fifth criterion set out in s 12(1) of the FHOG Act. There are various historical versions of this provision, the version that applies in this matter is as follows:

12 Criterion 5—Residence requirement

(1) An applicant for a first home owner grant must occupy the home to which the application relates as the applicant’s principal place of residence for a continuous period of at least 6 months.

(1A) However, if the Chief Commissioner is satisfied there are good reasons to do so, the Chief Commissioner may:

(a) approve a shorter period, or

(b) exempt the applicant from the requirement to comply with subsection (1).

(1B) The period of occupation required under subsection (1), or the shorter period approved under subsection (1A) (a), must start within 12 months after completion of the eligible transaction or a longer period approved by the Chief Commissioner.

(2) If an application is made by joint applicants and at least one (but not all) of the applicants complies with the residence requirement, the non-complying applicants or applicants are exempted from compliance with the residence requirement.

13 Subject to certain conditions, a grant can be paid under s 20 of the FHOG Act in advance in anticipation of the residence requirement. Section 23 of the FHOG Act gives the Chief Commissioner power to vary or reverse a decision made in respect of an application for a grant where he is later satisfied that the decision is incorrect.

14 Power to require repayment and impose penalties is given to the Chief Commissioner under s 45 of the FHOG Act.

DUTIES ACT

15 In tandem with the grant scheme, the government also introduced the First Home Plus Concession scheme under the Duties Act. Section 69 of the Duties Act sets out the scheme as follows:

69 The nature of the scheme

This scheme is intended to help people who are acquiring their first home. Under the scheme, the acquisition and any mortgage given to assist the financing of the acquisition is subject to a concession or exemption from duty.

16 Under s 70 the following transactions and instruments are eligible for consideration under the scheme:

(a) agreements for sale or transfer entered into on or after 4 April 2004,

(b) transfers that occur on or after 4 April 2004 (other than transfers made in conformity with an agreement for sale or transfer entered into before 4 April 2004),

(c) mortgages over land the subject of those agreements or transfers.

17 Section 74 deals with eligible agreements of transfers and restricts the concession to agreements or transfers for the acquisition of a first home or the acquisition of vacant land intended to be used as the site of the first home. Under s 80 of the Duties Act, no duty is chargeable on an agreement or transfer of a dwelling valued up to $500,000 or $300,000 in the case of a vacant block of residential land if the application concerning an eligible agreement or transfer is approved by the Chief Commissioner.

18 An applicant under the First Home Plus Concession scheme must comply with s 76 of the Duties Act which, at the relevant time, provided as follows:

“ 76 Residence requirement

(1) The home must be occupied by the person or persons who are acquiring it as a principal place of residence for a continuous period of at least 6 months, with that occupation starting within 12 months (or such longer period as the Chief Commissioner may approve) after completion of the agreement or transfer. This requirement is referred to as the residence requirement .

(2) The Chief Commissioner may, if satisfied there are good reasons to do so in a particular case:

(a) modify the residence requirement by approving a shorter period of occupation by the person or persons, or

(b) exempt the person or persons from the requirement to comply with the residence.

(3) In the case of an agreement or transfer for the acquisition of a vacant block of residential land, it is sufficient that the Chief Commissioner is satisfied that the vacant block is intended to be used as the site of a home to be occupied by the person or persons who are acquiring it as their principal place of residence.

(4) The residence requirement does not apply to a person who acquires an interest in the property concerned solely for the purpose of assisting the other purchaser or purchasers in financing the acquisition.

(5) For the purpose of this section, an agreement or transfer is completed when a purchaser or transferee becomes entitled to possession of the home and, if the interest in the land acquired by the purchaser or transferee is registrable under a law of the State, the interest is so registered.

(6) (Repealed)”

19 Under s 76A, the Chief Commissioner can approve an application for the concession in advance of satisfaction of the residence requirement. However, if an application is approved in anticipation of compliance with the residence requirement, the approval is given on condition that, if the residence requirement is not complied with, the applicant must within 14 days after end of the period allowed for compliance give written notice of that fact to the Chief Commissioner, and pay the relevant duty to the Chief Commissioner.

TA ACT

20 The relevant interest provisions are as follows:

“21 Interest in respect of tax defaults

(1) If a tax default occurs, the taxpayer is liable to pay interest on the amount of tax unpaid calculated on a daily basis from the end of the last day for payment until the day it is paid at the interest rate from time to time applying under this Division.

…

22 Interest rate

(1) The interest rate is the sum of:

(a) the market rate component, and

(b) the premium component.

(2) The market rate component is:

(a) unless an order is in force under paragraph (b), the Bank Accepted Bill rate rounded to the second decimal place (rounding 0.005 upwards), or

(b) the rate specified for the time being by order of the Minister published in the Gazette.

(3) The premium component is 8% per annum.

(4) In this section, the Bank Accepted Bill rate in respect of any day is the yield rate for 90-day Bank Accepted Bills published by the Reserve Bank for the month of May in the financial year preceding the financial year in which the day occurs.

…

25 Remission of interest

The Chief Commissioner may, in such circumstances as the Chief Commissioner considers appropriate, remit the market rate component or the premium component of interest, or both, by any amount.”

Discussion and Reasons for Decision

21 It was not in dispute that the applicants did not occupy and use the property as their principal place of residence during the period they owned the property and the applicants accordingly did not comply with the residence requirement under s 12(1) of the FHOG Act and under s 76(1) of the Duties Act. Having failed to comply with the “residence requirement”, the applicants were required under s 20(3) of the FHOG Act to repay the grant and under s 76A(2) of the Duties Act to pay the relevant duty on the transfer and mortgage of the property However, s 12(1A)(b) of the FHOG Act and s 76(2)(b) of the Duties Act confers on the respondent a discretion to exempt an applicant from the residence requirement if the respondent is satisfied that “there are good reasons to do so”.

22 The question for the Tribunal was whether there were “good reasons” to exempt the applicants from the residence requirement.

23 The applicants’ case was that the injury to the applicant at work in 2002, the death of the second applicant’s brother in a car accident in 2002, the birth of their first child in May 2004 and the hospitalisation of the second applicant’s brother from December 2004 for almost ten months were matters that prevented the applicants from residing in the property. The applicants further submitted that they “had no intention to fraud the system” and that they had the intention to occupy the property but were made to enter into a 12 months rental lease for commercial reasons on advice given by their real estate agent.

24 The respondent’s case was that, in the absence of any express criteria in s 12(1A)(b) of the FHOG Act and s 76(2)(b) of the Duties Act, the Tribunal should only exercise the discretion to grant an applicant exemption from the residence requirement under both the FHOG Act and Duties Act “in circumstances where the applicant genuinely intended to occupy the house as his or her principal place of residence, but failed to do so due to a change in circumstances after the purchase of the home.” This submission was on the basis of what was said in the Second Reading Speech to the State Revenue Legislation Further Amendment Act 2005 when introducing the amended s 12 of the FHOG Act, applicable in this matter.

25 The respondent further submitted that:

… In the absence of any express conditions governing the exercise of the discretion in s. 12(1A)(b) and s. 76(2)(b), the decision-maker must be guided by the underlying purpose and policy of the FHOG Act and Duties Act respectively “… so far as that is manifested in ” the relevant Act: see Giris v Federal Commissioner of Taxation (1969) 119 CLR 365, at 384; see also for example K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd (1985) 60 ALR 509, at 514; see also CIC Insurance Limited v Bankstown Football Club Limited (1995) 187 CLR 384, at 408; see also Deputy Commissioner of Taxation v Clark [2003] NSWCA 91 (“Clark”), at para. [115].

58. The discretionary power in s. 12(1A)(b) and s. 76(2)(b) must be exercised in a manner which does not “ defeat the fundamental legislative objectives of the scheme of regulation within which the dispensing power is located ”: see Chief Commissioner of State Revenue v Pacific General Securities Ltd & Finmore Holdings Pty Ltd (No 2) (RD) [2005] NSWADTAP 54. As French J noted in Federal Commissioner of Taxation v Swift (1989) 18 ALD 679 in relation to the dispensing power available to the Commissioner in that case (at 696):

“ The dispensing power is incidental and ancillary to the primary object of the legislation. On the spectrum of cases in which it could conceivably be exercised, there will be a threshold beyond which it would defeat the primary object of the legislation.”

…

62. Having regard to these principles, there are at least two primary limitations on the scope of the discretionary powers in s. 12(1A) and s. 76(2). Firstly, the power must not be exercised to defeat the object of the legislation to encourage and assist first home ownership. Secondly, the exercise of the discretionary power must not be inconsistent with the stringent obligation imposed on an applicant to fulfil the residence requirements (and to notify the Chief Commissioner and repay the Grant where there has been a failure to comply with the residence requirement).”

26 In relation to the facts of this matter, the respondent first pointed out that the applicants were not honest in their application for the grant. The applicants had indicated in the application form dated 5 November 2004 that they would occupy the property by 25 December 2004. But that they had already leased the property on 18 August 2004 for a period of 12 months expiring on 18 August 2005 and were thus in no position to occupy the property on 25 December 2004.

27 Secondly, it was pointed out that the second applicant’s brother was hospitalised on 25 February 2005 when the property was already let and his illness was not a cause of the applicants’ failure to occupy the property. Further it was submitted that the death of the second applicant’s brother on Easter Sunday 2002 and the first applicant’s work injury on 17 October 2002 “occurred at a time significantly before the applicants exchanged contracts for the purchase of the grant property and at times significantly before the applicants made their application for the grant and declared their intention to meet the requirements of those Acts” and “that the applicants were aware of any difficulties those events were causing or might cause them but nevertheless decided to continue with the purchase of the property and the undertaking of the obligations placed upon them by the receipt of the grant”.

28 I agree with Mr Gerard, who appeared for the Chief Commissioner, that care has to be taken to ensure that the exercise of the discretionary power does not undermine the primary objective of the FHOG Act and in the case of the Duties Act, the objective of the FHP Concession scheme. I also agree with Mr Gerard that, in the absence of any express conditions governing the exercise of the discretion found in s 12 (1A)(b) of the FHOG Act and in s 76(2)(b) of the Duties Act, the decision-maker must be guided by the underlying purpose and policy of these Acts. I further agree with the submission that the discretion is intended to allow the grant to be retained under the FHOG Act and the FHP Concession to apply under the Duties Act in circumstances where the applicant had a real bona fide intention to occupy and use the home as his or her principal place of residence, but failed to do so due to a change in circumstances after the purchase of the home. Generally speaking, an acceptable circumstance would be one outside the control of the applicant. Without placing any limitation, the circumstances would include the need for an applicant to move interstate or overseas to carry out work duties, the serious illness of an applicant after exchange of contracts preventing occupation and use of the property, or a financial difficulty, for example loss of the income-earning job, after purchase of the property.

29 In this matter, when the applicants paid their deposit of $20,000 to secure the property “off the plan” in May 2003, the decision to purchase the property was made some three years after the unfortunate death of the second applicant’s brother and more than a year after the first applicant had the work injury. When making the decision to purchase the property, the applicants would have had regard to these matters. It is also difficult to understand how the illness of the second applicant’s other brother prevented the applicants from complying with the residence requirement. When on 25 February 2005 her brother was admitted to hospital, the property had already been leased. It is also important to note that the applicants proceeded to purchase another property, the Jervis Street property for $535,000, whilst they were still receiving rental income under the lease from the property. Having let the property and purchased another property the applicants really had no intention whatsoever to occupy the property as their residence. It was sold at the conclusion of the lease.

30 This is then a case in which the grant of discretionary relief would clearly defeat the primary object of the grant under the FHOG Act and the FHP Concession under the Duties Act, which is to provide assistance to first home owners and would also be inconsistent with the stringent obligations imposed on applicants to fulfil the residence requirement.

31 The two matters that remain are the FHOG Act penalty imposed in the assessment to recover the grant and the interest included in the assessment to recover the duty payable on the transfer and mortgage of the property.

32 In this matter, the respondent issued an assessment to recover the grant pursuant to his powers under s 45(1)(b) of the FHOG Act with a penalty of 20%. If an applicant fails to make a repayment of the grant required under s 45 or the conditions of the grant, the respondent is entitled to impose a penalty not exceeding the amount the applicant is required to repay.

33 In the recent decision in Philpott v Chief Commissioner of State Revenue (RD) [2008] NSWADTAP 18, the Appeal Panel of the Tribunal approved comments I made in Knight and Anor v Chief Commissioner of State Revenue [2008] NSWADT 83 regarding the relevant factors that should be taken into account in assessing the level of penalty to be imposed in a particular case. I suggested that the factors to determine the level of culpability should include the following:

(1) the truthfulness of the original statements made by the applicant in his or her application for the grant;

(2) the surrounding circumstance including the intention of the applicant in relation to the occupation and use of the property as his or her principal place of residence at the time when seeking the grant;

(3) the reasons for failure to comply with conditions of the grant;

(4) whether the applicant has occupied the property as his or her principal place of residence;

(5) the candour of the applicant in his or her responses to compliance inquiries; and

(6) whether the grant has been refunded.

34 The factual matters that were relevant in this matter to determine the level of penalty included the following:

1. The applicants indicated in their application that they would occupy the property as their principal place of residence on 25 December 2004, but the evidence before the Tribunal was that they were in no position to meet that obligation because the property had been let prior to the making of the application.

2. The applicants failed to comply with the residence requirement.

3. The property was let for 22 months and the applicants earned rental income.

4. The applicants failed to inform the respondent of their failure to meet the residence requirement and failed to repay the grant.

5. The property was never used or occupied by the applicants and it was sold.

6. The applicants also bought another property whilst the property was being rented and, accordingly, had no intention of using and occupying the property as their principal place of residence

35 Taking the above factual matters into account, it is not difficult to conclude that the applicants did not take reasonable care and, in fact, acted quite recklessly by making a false commitment in their application for the grant that they would occupy and use the property as their principal place of residence by 25 December 2004. On 25 November 2004, when they applied for the grant, the property had already been let to tenants on 19 August 2004 for a period of fifty-two weeks. The applicants were, in those circumstances, in no position to commence occupation of the property for a continuous period of 6 months as their principal place of residence within 12 months after completion of the eligible transaction, which occurred on 12 July 2004.

36 The factors drawn to the attention of the Tribunal by the applicants were matters that, as correctly pointed out by Mr Gerard, “occurred at a time significantly before the applicants exchanged contracts for the purchase of the grant property and at times significantly before the applicants made their application for the grant”. The applicants were fully aware when they purchased the property of the difficulties of those events in relation to the purchase of the property. It was really a matter of choice made by the applicants to act in the way they did, to stay with the second applicant’s family while earning rental income and also to proceed to purchase another property. The penalty of 20 percent imposed was in all circumstances appropriate and should not be disturbed.

37 Interest was included in the assessment issued under the TA Act to recover the duties payable on the transfer and the mortgage. Section 21(1) in Part 5 of the TA Act provides that if a “tax default” occurs, the taxpayer is liable to pay interest on the amount of tax unpaid calculated on a daily basis from the end of the last day when the payment was due until the day upon which the outstanding tax is paid. In this matter, the failure by the applicants to pay the relevant duty on the transfer and mortgage within 14 days after the end of the period they were allowed to comply with the residence requirement was a “tax default” in terms of the definition of “tax default” found in s 3 of the TA Act. The term “tax” is defined in s 3 of the TA Act to include any duty payable under a taxation law.

38 The applicable interest rate consists of a variable market rate component and a premium rate component. The market rate component fluctuates and is connected to an external rate, the Reserve Bank’s Accepted Bill rate. The premium rate component is fixed by s 22(3) of the TA Act at 8 per cent.

39 The market rate component, as was pointed out by the Appeal Panel of the Tribunal in Chief Commissioner of State Revenue v Incise Technologies Pty Ltd [2004] NSWADTAP 19, “is intended to compensate the Commissioner (on behalf of the Government of New South Wales) for not having the benefit of the tax payment from the time it was due … is a component that could rarely, if ever, be waived as otherwise tax would be paid at a devalued amount thereby discriminating against taxpayers who meet their obligations on time”.

40 On the other hand, as observed by the Appeal Panel in Incise, the premium component of interest “is a form of penalty” and its purpose “is to provide an additional economic deterrent against taxpayers failing to meet their obligations on time”.

41 In this matter, the respondent included both interest components in the assessment issued to the applicants to recover the duty payable on the relevant transfer and mortgage.

42 The Chief Commissioner is given discretion by s 25 of the TA Act, “in such circumstances as the Chief Commissioner considers appropriate”, to remit the market rate component or the premium rate component or both by any amount.

43 In Trust Co. of Australia v Chief Commissioner of State Revenue [2002] NSWADT 21, the Tribunal explained the circumstances when the market rate interest component can be remitted as follows:

“27 In cases where an amount of interest is imposed by the application of the market rate, only exceptional circumstances would justify any remission. The narrow category of circumstances would include cases where the ‘tax default’ is entirely due to a fault of the Chief Commissioner. Other circumstances would include situations completely out of the control of the taxpayer, such as postal strikes, serious illness of the taxpayer and natural disasters (bush fires, floods and earthquakes).”

44 In this matter, there were no special circumstances before the Tribunal to warrant remission of the market rate component.

45 In the case of the premium rate component, it would depend on the level of culpability and general behaviour of the taxpayer. The factors that have been taken into account in relation to the penalty under the FHOG Act in this matter equally apply to the imposition of the premium rate component under the TA Act. In addition, the applicant did not inform the respondent of his failure under the Duties Act to comply with the “residence requirement” and has not paid the duty payable on the transfer and mortgage. When all the relevant circumstances are taken into account, the respondent was entitled to include the premium component of interest in the assessment issued to the applicants to recover the outstanding duties. There were no grounds to reduce or remit the premium rate component interest included in the assessment.

46 Accordingly the decisions under review are affirmed.

Orders

1. The decision of the Chief Commissioner of State Revenue to recall the Grant ($7,000) and impose a penalty of 20% ($1,400.00) is affirmed.

2. The decision of the Chief Commissioner of State Revenue to revoke the concession granted to the applicant in accordance with the First Home Plus Scheme under the Duties Act is affirmed.

3. The decision of the Chief Commissioner of State Revenue to assess transfer duty of ($14,212.00) with interest at the market and premium rates ($4,160.84) and mortgage duty ($1,499.00) with interest at the market and premium rates ($438.34) is affirmed.