Feroze Chowdary and Commissioner of Taxation
[2013] AATA 449
•1 July 2013
[2013] AATA 449
Division SMALL TAXATION CLAIMS TRIBUNAL File Number(s)
2012/5443-5444
Re
Feroze Chowdary
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Dr Gordon Hughes, Member
Date 1 July 2013 Place Melbourne The Tribunal affirms the decision under review.
.................. .[sgd].....................................................
Dr Gordon Hughes, Member
Taxation – penalty for failing to take reasonable care in the preparation of income tax returns – each decision turns on its facts – no evidence that applicant took reasonable care – the fact alone that the taxpayer made an honest mistake is not sufficient to avoid a penalty or to justify a remittance of the penalty
Legislation
Taxation Administration Act 1953 sections 284-75(1), 284-75(5), 284-80(1), 284-90(1), 284-225(1), 298-20(1) of Schedule 1
Cases
Dixon v Commissioner of Taxation [2008] 167 FCR 287
Ryvitch and Commissioner of Taxation, Re [2002] AATA 607
Johnston and Commissioner of Taxation, Re [2011] AATA 20Interest Pty Ltd & Ors and Commissioner of Taxation, Re [2001] AATA 710
Secondary Materials
Practice Statement Law Administration PS LA 2012/5: Administration of penalties for making false or misleading statements that result in shortfall amounts
A New Tax System (Tax Administration Bill) (No 2) 2000 Explanatory Memorandum
REASONS FOR DECISION
Dr Gordon Hughes, Member
1 July 2013
The applicant sought review by this Tribunal of an objection decision made by the respondent to disallow his claim for a remission of penalties. The penalties had been imposed at the rate of 25% for failing to take reasonable care in the preparation of his income tax returns for the 2010 and 2011 financial years (the relevant financial years).
BACKGROUND
The applicant claimed the following deductions for the 2010 financial year:
(a)$16,665 for dividend deductions in relation to interest charged on monies borrowed for purchasing shares; and
(b)$150 for the costs of managing his tax affairs.
The applicant claimed the following deductions for the 2011 financial year:
(a)$25,487 for dividend deductions in relation to interest charged on monies borrowed to purchase shares; and
(b)$150 for the costs of managing his tax affairs.
Arising out of an income tax audit, the applicant was requested to provide further information in support of the deductions claimed but failed to do so by the due date of 21 May 2012. As a consequence, the respondent disallowed the deductions for the relevant financial years.
Specifically, the audit determined that the applicant had claimed dividend deductions in respect of interest incurred on an amount borrowed to purchase shares in his wife's name. As the applicant did not derive income from these shares, he was not entitled to claim the deductions.
At a less significant level, the applicant was unable to substantiate the $150 claimed for each relevant financial year in respect of costs incurred in managing his tax affairs.
The applicant was issued with a Notice of Amended Assessment for the 2010 financial year which increased his taxable income for the year ended 30 June 2010 from $168,027 to $184,842, plus a shortfall interest charge of $714.39. This resulted in a tax shortfall of $6,980.84.
The applicant was issued with a Notice of Amended Assessment for the 2011 financial year which increased his taxable income from $207,682 to $233,319, plus a shortfall interest charge of $487.16. This resulted in a tax shortfall of $11,921.20.
The applicant was issued with a Notice of Assessment of Shortfall Penalty for $1,745.20 in respect of the 2010 income year and $2,980.30 in respect of the 2011 income year.
Following the lodgement of a Notice of Objection by the applicant, the respondent remitted the shortfall interest charge amounts of $714.39 and $487.16 for the 2010 and 2011 financial years respectively. Accordingly, the only issue before the Tribunal was the question of the shortfall penalties.
LEGISLATION
Section 284-75(1) of Schedule 1 to the Taxation Administration Act 1953 (the Act) provides:
You are liable to an administrative penalty if:
(a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a * taxation law (other than the * Excise Acts); and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
Section 284-80(1) of Schedule 1 to the Act provides:
You have a shortfall amount if an item in this table applies to you. That amount is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been.
Shortfall amounts Item You have a shortfall amount in this situation: 1
…
A * tax-related liability of yours for an accounting period, or for a * taxable importation, or under the Superannuation (Unclaimed Money and Lost Members) Act 1999, worked out on the basis of the statement is less than it would be if the statement were not false or misleading
Section 284-90(1) of Schedule 1 to the Act provides:
The base penalty amount under this Subdivision is worked out using this table and section 284-224 if relevant:
Base penalty amount Item In this situation: The base penalty amount is: …
3
…
You have a * shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a * taxation law (other than the * Excise Acts)
25% of your * shortfall amount or part
Section 284-75(5) of Schedule 1 to the Act provides:
You are not liable to an administrative penalty under subsection (1) or (4) for a statement that is false or misleading in a material particular if you, and your * agent (if relevant), took reasonable care in connection with the making of the statement.
Section 284-225(1) of Schedule 1 to the Act provides:
The *base penalty amount for your *shortfall amount or *scheme shortfall amount, for part of it or for your false or misleading statement is reduced by 20% if:
(a)the Commissioner tells you that an examination is to be made of your affairs relating to a * taxation law for a relevant period; and
(b)after that time, you voluntarily tell the Commissioner, in the * approved form, about the shortfall, the part of it or the false or misleading nature of the statement; and
(c)telling the Commissioner can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the examination.
Section 298-20(1) of Schedule 1 to the Act provides that The Commissioner may remit all or a part of the penalty.
DISCUSSION
The applicant, who represented himself before the Tribunal, acknowledged that he had made a mistake when completing his e-tax returns in the relevant financial years. He described it as a true and honest mistake and said he had done his best to follow the instructions on the e-tax help pages.
The applicant told the Tribunal that he presently works as the Australian General Manager for a US company. He has worked at the company since 1995. He has an engineering degree as well as an MBA degree, and has been General Manager since 2008.
The applicant said that at the time of taking out the loan - jointly in the name of his wife ‑ in 2000, he had obtained advice of a general nature from his bank as to the deductibility of interest payments. He did not seek specific advice about whether deductions could be claimed in his name in circumstances where the shares were held solely in his wife's name. Further, he had not specifically sought professional advice prior to completing his income tax returns for the relevant financial years.
In relation to the $150 deduction for the cost of managing his tax affairs, the applicant said that he had interpreted the e-tax module help pages as meaning he could claim up to this amount without the requirement to produce evidence. However, the applicant was unable to clarify where he had derived the figure of $150 from, as it did not appear on the screen shots of the e-tax help pages produced by the respondent during the proceedings.
The respondent contended that the applicant had made a false or misleading statement for the purposes of section 284-75(1) of Schedule 1 to the Act.
Specifically, the Commissioner referred to paragraph 21 of Practice Statement Law Administration PS LA 2012/5: Administration of penalties for making false or misleading statements that result in shortfall amounts (PS LA 2012/5).
The respondent contended that it was a question of fact as to whether a statement is false or misleading in a material particular. The respondent submitted that the applicant had made statements which were false and misleading by claiming dividend deductions and the cost of managing his taxation affairs to which he was not entitled. As a result, a shortfall amount was recorded for the relevant financial years.
Pursuant to section 284-90(1) of Schedule 1 of the Act, a penalty of 25% of the tax shortfall amount was applied on the basis that a tax shortfall had occurred, in the respondent's opinion, due to the applicant's failure to take reasonable care when preparing his tax returns.
Section 284-75(5) of Schedule 1 to the Act provides that a taxpayer will not be liable to an administrative penalty for a false or misleading statement if reasonable care had been taken in connection with making the statement. The term reasonable care is not defined in the Act. However, paragraph 1.42 of A New Tax System (Tax Administration) Bill (No 2) 2000 Explanatory Memorandum (the Explanatory Memorandum) provides that a statement is false or misleading in a material particular if something is omitted or included which, if known, would have caused a taxation officer to determine a claim in another way.
In addition, the respondent pointed to paragraph 1.73 of the Explanatory Memorandum which stated that:
The ultimate consideration would be the honest efforts of the taxpayer, as displayed by the actions of the taxpayer in the context of the taxpayer's circumstances, to ascertain the proper tax position.
The respondent contended that, according to paragraphs 1.67 and 1.68 in the Explanatory Memorandum, the test was not whether a person had tried to act with reasonable care but rather whether, objectively, reasonable care had been taken in the circumstances. According to paragraph 1.70, reasonable care required the taxpayer to make appropriate enquiries to arrive at the correct taxation treatment.
The applicant claimed to have followed the e-tax modules in completing his income tax returns for the relevant financial years. The respondent argued that it was clear, when following the e-tax modules, that dividend deductions could not be claimed where the expenses were not incurred in the production of the taxpayer's assessable income. The respondent contended that:
A reasonable person in the Applicant's circumstances would not have come to the conclusion that he was entitled to claim dividend deductions for shares which were not in his name or for the costs of managing his tax affairs without appropriate substantiation.
In support of this contention, the respondent emphasised that the applicant was experienced in preparing his own and his wife's income tax returns. He was a well‑educated individual with senior management responsibilities. Such an individual would be expected to have an awareness of fundamental rules regarding the ability to claim deductions. The respondent also emphasised that the deductions claimed by the applicant were sizeable in proportion to his assessable income for the relevant financial years.
In relation to the wording of the e-tax module help pages, screen shots tendered in evidence by the respondent stipulated, under the heading Relevant deductions:
You can claim a deduction for interest incurred on money borrowed to purchase shares and other related investments from which you derived assessable dividend income.
The e-tax module help pages also confirm that a taxpayer has a right to deduct Expenses you incurred in managing your own tax affairs. However, there is no reference to a right to claim up to $150 without substantiation, as alleged by the applicant.
The applicant told the Tribunal that he had not received a letter from the respondent dated 23 April 2012, advising of the pending audit and inviting him to review his records and make a voluntary disclosure of any errors or omissions. The Tribunal does not make a finding as to whether this letter was in fact received by the applicant because nothing turns on this disputed fact when considering whether the shortfall penalties should be remitted.
The potential relevance of an invitation to make a voluntary disclosure lies in section 284-225(1) of Schedule 1 to the Act which provides for a reduction of the base penalty if, having received notice of a proposed audit, the taxpayer makes a voluntary disclosure about the shortfall; and this disclosure saved the Commissioner a significant amount of time or resources. It is difficult to envisage, however, that any response at that time would have significantly impacted upon the respondent's resources, given that the issues (and accordingly the audit) would have been straightforward. In addition, the applicant was clearly unaware at that time that he had incorrectly claimed the deductions in question.
With respect to the remission of penalties pursuant to section 298-20 of Schedule 1 of the Act, PS LA 2012/5 paragraph 156 outlines the relevant considerations when exercising the discretion to remit; including the circumstances of the situation, and the purpose and objective of the penalty regime.
The respondent referred to Dixon v Federal Commissioner of Taxation [2008] 167 FCR 287 at 292, on the issue of how the discretion to remit should be exercised, noting that the Full Court of the Federal Court had observed that the relevant question was:
… whether any part of the penalty should be remitted on the basis that the outcome is harsh, having regard to the particular circumstances of the Taxpayer.
The respondent cited several cases as examples of circumstances where the Tribunal has found that the discretion to remit should be exercised ‑ Re Ryvitch and Commissioner of Taxation [2002] AATA 607, Re Johnston and Commissioner of Taxation [2011] AATA 20, Re Interest Pty Ltd & Ors and Commissioner of Taxation [2001] AATA 710. However, none of these decisions bore relevance to the circumstances before the Tribunal, save perhaps that they emphasise that extreme circumstances would be required in order to justify a remission.
DECISION
The Tribunal considers that the respondent was correct in applying a 25% penalty pursuant to section 284-90(1) of Schedule 1 to the Act. The Tribunal has no reason to doubt the honesty and integrity of the applicant, and it accepts his explanation that he made an honest mistake. The applicant's good intentions and good character are, however, not sufficient on their own to negate the effect of an error in completing his income tax returns. As an intelligent person, the applicant could reasonably have been expected to understand that a deduction could not be claimed in respect of:
·shares held solely in his wife's name; and
·the costs of managing his tax affairs without appropriate substantiation.
The Tribunal considers that both the law, and the e-tax module help pages, are clear in this regard.
On the question of remission, the Tribunal considers that the circumstances contemplated by section 298-20 of Schedule 1 to the Act do not exist in the present case. The section is essentially designed to address harsh or perverse applications of the penalty regime imposed by the Act. In the present instance, the outcome may well be unfortunate for the applicant, who the Tribunal accepts at all times acted honestly. But the fact remains that his income tax returns for the relevant financial years claimed significant deductions to which he was not entitled; and for which he must therefore bear the consequences.
For the above reasons, the Tribunal affirms the decision under review.
I certify that the preceding 39 (thirty-nine) paragraphs are a true copy of the reasons for the decision herein of Dr Gordon Hughes, Member. .............[sgd]...........................................................
K. Randall, Associate
Dated 1 July 2013
Date of hearing 19 June 2013 Date final submissions received 20 June 2013 Applicant In person Advocates for the Respondent Mariam Boles and Anne Smyth, ATO Legal Services Branch
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