Dewheath Pty Ltd and Commissioner of Taxation

[2014] AATA 743

Administrative Appeals Tribunal

ADMINISTRATIVE APPEALS TRIBUNAL             )
  )        No: 2012/5650
Taxation Appeals Division  )

Re: Dewheath Pty Ltd
Applicant

And: Commissioner of Taxation
Respondent

DIRECTION

TRIBUNAL:             Deputy President J W Constance

DATE:   11 November 2014

PLACE:                  Sydney

The Tribunal directs the Registrar, pursuant to subsection 43AA(1) of the Administrative Appeals Tribunal Act 1975, to alter the text of the decision in this application as follows:

1. The reference to “Section 285-75(3)(a)” under the heading ‘Legislation’ should instead refer to “Section 284-75(3)(a)”; and

2. In the 1st line of paragraph 2, the reference to “Section 285-75(3)(a) of Schedule 1 to the Taxation Administration Act 1953 (Cth)” should instead read, “Section 284-75(3)(a) of Schedule 1 to the Taxation Administration Act 1953 (Cth).

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

Deputy President J W Constance

[2014] AATA 743  

Division	TAXATION APPEALS DIVISION
File Number	2012/5650
Re	Dewheath Pty Ltd
APPLICANT
And	Commissioner of Taxation
RESPONDENT

Decision

Tribunal	Mr D Letcher, QC, Senior Member
Date	15 October 2014
Place	Sydney

The decision under review is affirmed.

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

Mr D Letcher, QC, Senior Member

Catchwords

TAXATION AND REVENUE - Remission of penalty - Failure to lodge Business Activity Statements - Failure to lodge Income Tax Returns - Applicant bears onus - Whether factors warranting remission - Onus not discharged - Decision under review affirmed

Legislation

Taxation Administration Act 1953 (Cth), ss 14ZZK, 285-75(3)(a), 298-20

Cases

Otway Pastoral Pty Ltd v Federal Commissioner of Taxation [2005] AATA 649

Sharkey v Commissioner of Taxation [2007] AATA 1435

REASONS FOR DECISION

Mr D Letcher, QC, Senior Member

15 October 2014

1. The applicant company, Dewheath Pty Ltd, failed to lodge Business Activity Statements (“BASs”) for the quarters ending 31 March 2008 to 30 June 2010 and Income Tax returns for the years ending 2007 to 2010 inclusive. The respondent issued default assessments with respect to each matter, and, in turn, the applicant lodged Objections to each which were refused by the respondent. After negotiation, the amounts of tax liability were agreed to be:

Quarter	Objection position: GST on sales	Revised GST on sales	Revised GST Shortfall (Net Amount)	New penalty Imposed
1 April 2008 to 30 June 2008	$48,215	$45,727	$34,480 ($35,681.00 less $1,201)	$26,760.75
1 July 2008 to 30 September 2008	$30,942	$28,455	$25,660.00	$19,245.00
1 October 2008 to 31 December 2008	$92,794	$87,818	$86,418.00	$64,813.50
1 January 2009 to 31 March 2009	$30,942	$28,455	$27,055.00	$20,291.25
1 April 2009 to 30 June 2009	$19,352	$16,864	$15,464.00	$11,598.00
1 January 2010 to 31 March 2010	$28,215	$25,727	$24,327.00	$0.00
Total	$213,404[1]	$142,708.50

[1] The Respondent wrote to the Applicant on 28 November 2013 incorrectly advising the Applicant that the total recalculated Net Amount was $213,404. Accordingly, the Respondent made a concession of $1,201 to give effect to this error.

Income Year	Objection Position	Amounts allowed		New Tax Short Fall	New Penalty Imposed
2007	$226,150.20	Sales Commission	$168,716.00	$127,179.90	$95,384.93
2008	$211,905.30	Interest	$57,888.35	$146,166.90	$109,625.18
		Sales Commission	$79,728.00
		Input tax credits	$81,512.00
2009	$24,250.20	Interest	$39,229.48	$5,942.70	$4,457.03
		Sales Commission	$21,795.00
Total	$279,289.50	$209,467.13

1. Pursuant to Section 285-75(3)(a) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (“TAA 1953”) the respondent applied a 75% administrative penalty to the net shortfall in taxes unpaid. The amount of tax and the imposition of the penalty are not challenged. The applicant seeks review only of the respondent’s decision not to remit the penalty in whole or part. The statutory scheme concerning calculation and remission of administrative penalties is set out at s298-20 of Schedule 1 to the TAA 1953. That provision provides for the exercise of discretion to remit penalties; a discretion which is vested in the Tribunal upon review of the original decision.

2. Accordingly, the only issue before the Tribunal was whether it should exercise its discretion to remit all or any part of the 75% penalty. Under section 14 ZZK of the TAA 1953, the applicant bears the onus of showing that there are factors which warrant remission.

   PRINCIPLES OF REMISSION

3. The legislation does not specify the circumstances in which the discretion under s298-20 should be exercised. However, decisions of the Full Federal Court establish that remission should be granted only where there is proof of circumstances mitigating a taxpayer’s failure to take reasonable care. Those decisions also establish that there must be proof of the circumstances of the individual taxpayer which would make it appropriate to exercise the discretion to remit the penalty. In Otway Pastoral Pty Ltd v Federal Commissioner of Taxation [2005] AATA 649 a penalty was substantially reduced because a bookkeeper had failed to notify the taxpayer that returns were not prepared, and, although the taxpayer was not in a financial position to rectify the matter quickly, the returns were all eventually lodged. In contrast, it was held in Sharkey v Commissioner of Taxation [2007] AATA 1435 that the taxpayer’s illness and inability to conduct his practice were insufficient reasons to justify a remission of penalty. This was considered necessary so as to maintain the importance of the statutory scheme, and to apply its obligations and consequences equally to all taxpayers.

4. In considering whether to exercise the discretion, there are several principles which may guide a decision maker in making their determination. These principles include: equality of treatment to all taxpayers in similar circumstances, the tailoring of penalties to secure improvement in compliance, balancing the deterrent value of penalties against hardship of a particular taxpayer and the importance of the concepts (found in criminal sentencing) of general and specific deterrence, retribution, rehabilitation and declaration.

   FACTUAL BACKGROUND

5. Dewheath Pty Ltd was a property developer controlled by Mr Peter Tapp. In the period of the outstanding BASs and tax returns, Dewheath built and marketed a project at Warners Bay NSW comprising 27 residential and three commercial units. Mr Tapp was the only witness giving evidence in the proceedings and stated that at all times he was the sole director, shareholder and employee of the applicant. Until mid-2008 an accountant/tax agent prepared all of its financial statements and tax returns for the applicant. Differences arose over accountancy performance, fees and investment loans and the accountant’s retainer was subsequently terminated. In November 2008, Dewheath retained its present accountant, Mr Ray Walker, who represented the applicant before the Tribunal.

6. In about 2008 the applicant sued its first accountant for negligence in its tax matters for the tax years 2001 to 2004 inclusive. The applicant says that the first accountant then wrongfully retained and refused to return to it all of the applicant’s books and records for the years 2005 to 2008 inclusive. It was the applicant’s case that without those records it could not prepare BASs or tax returns and so its failure to do so should not result in a penalty.

   BUSINESS ACTIVITY STATEMENTS

7. The applicant did not lodge BASs for the period between 31 March 2008 and 30 June 2010. The respondent issued default assessments in late 2010 in the absence of any lodgements.

8. Mr Tapp’s evidence was that the preparation of BASs during the period was not important because there was minimal activity after the development had been completed and sold. He said that “during the GFC (“Global Financial Crisis”) there were no sales. The property market was at its bottom”. If correct, this might have meant that little or no net GST would have arisen. However, in cross-examination, he conceded that substantial amounts of net GST had in fact been incurred during the 2008 period, resulting from Dewheath’s sale of the Warners Bay units.

9. Mr Tapp agreed that in the whole 2008-2010 period he (and not his first accountant) had received the documents for which BASs for that period would be prepared. When asked why he had not lodged BASs he replied: “That’s a good question”. Later he said that his attention had been “focussed on the 2005-2006 dispute” with his first accountant and that “probably my accounting responsibilities lapsed”.

10. Mr Tapp did not dispute that after the applicant’s registration for GST on 1 July 2000, BASs for 44 out of the 64 quarters had been either filed late or not at all. Mr Tapp could not recall the numerous overdue notices which had been upon both himself and the applicant – the service of which was established by the documentary evidence produced by the Respondent.

    INCOME TAX RETURNS

11. The applicant did not file tax returns for the years 2007 to 2009, with default assessments being issued by the Respondent in November 2010. Mr Tapp stated that his first accountant had failed to lodge Dewheath’s income tax returns for 2005 to 2007 inclusive and that his second accountant could not lodge accurate returns without knowing the earlier figures for depreciation and balance sheet values. He had no adequate explanation as to why he did not pursue the first accountant to file returns 2005 to 2008 (before he was in dispute with that accountant) although he knew they were required. At one stage he said that ATO personnel had told him that returns were not required until an audit of some previous year’s return was completed. He did not dispute that the audit was completed on 8 February 2005 and that it concerned matters in 2001 to 2004. He alleged that the applicant was unable to prepare and lodge returns because the general ledger details were held by the first accountant between 2005 and 2010, and were not made available to Dewheath despite numerous requests. No court process was initiated and Mr Tapp could not remember if the respondent had issued demands for these returns. He said: “I can’t recall getting any” despite copies of the correspondence being tendered by the respondent.

12. Mr Tapp agreed that he did not request his solicitors to subpoena or otherwise require production of the 2005 to 2008 documents to the Supreme Court or himself, despite his allegations that they were being wrongfully held by the first accountant. The respondent’s evidence showed that Mr Tapp did not respond to numerous reminders and demands for the outstanding returns.

    CONSISTENT TREATMENT

13. Equality of treatment forms a part of the fair and reasonable administration of tax laws. Dewheath’s asserted reason for failing to meet its taxation obligations during the relevant period was the GFC. However, other property developers met their obligations during the GFC as well as other times of financial difficulty. Importantly, Dewheath did not meet its taxation obligations and indeed did not prove that any hardship had been suffered at all.

    EXTENUATING CIRCUMSTANCES

14. Dewheath alleged particular individual circumstances of lack of access to its records. However, although Mr Tapp had the relevant documents required to establish Dewheath’s liability for GST for the period 2008 to 2010 the applicant still failed to lodge BASs. I think the true explanation is that Mr Tapp’s energy was directed to his dispute with his accountant .As to the outstanding tax returns, the applicant did not take reasonable steps to obtain the material required to complete the returns, nor did it file “estimate” returns with explanations or make any attempt to respond to the reminders issued by the respondent. I do not find that there were any extenuating circumstances explaining or excusing the applicant’s failures to comply with tax law.

    COMPLIANCE HISTORY

15. Importantly, these failures to lodge returns were not an isolated instance. The respondent’s graph (Exhibit 3) showed that from 2000 to 2014 the applicant continually failed to lodge returns on time or at all. Both before and after the period 2007 to 2010, the applicant failed to meet its tax obligations. This shows not only an absence of reasonable care but also a lack of any genuine attempt to comply. Further, in 2005 the applicant was found guilty of failing to lodge income tax returns for 2002 and 2003 and was fined $600. This does not seem to have had the desired effect of inducing compliance. While administrative penalties are intended to operate as form of punishment, they are also used to deter against further breaches of the law, as well as to deter other taxpayers from similar conduct.

    CONCLUSION

16. The applicant has failed to show individual mitigating circumstances lessening the culpability for its repeated failures to comply with taxation law requirements for the lodgement of BASs and income tax returns. In fact, the excuses were found to be false or unproven. The applicant has not discharged its onus of proof as required by Section 14ZZK.

17. The applicant did not improve its lodgement performance despite prosecution and many reminders of its obligations. Its protestations that it was the helpless victim of circumstances were not true. It showed a disregard for the requirements of the law. The factors of retribution (punishment), deterrence and declaration (equality of treatment) must be foremost given the lack of evidence of any rehabilitation (change of conduct). My conclusion is that the Tribunal’s discretion should not be exercised in the favour of the applicant and that there should be no remission of penalty in this case.

    DECISION

18. The decision under review is affirmed.

I certify that the preceding nineteen (19) paragraphs are a true copy of the reasons for the decision herein of Mr D Letcher, QC, Senior Member

........................................................................

Associate

Dated 15 October 2014

Date of hearing	17 September 2014
Advocate for the Applicant	Mr R Walker, Raymond Walker & Company
Solicitors for the Respondent	Ms V Hammond, ATO Review and Dispute Resolution Group