HKYB and Commissioner of Taxation (Taxation) - [2018] AATA 4770

HKYB and Commissioner of Taxation (Taxation) [2018] AATA 4770 (31 October 2018)
Division:TAXATION & COMMERCIAL DIVISION
File Number: 2017/2746
Re:HKYB
APPLICANT

AndCommissioner of Taxation
RESPONDENT

DECISION
Tribunal:The Hon Justice J A Logan RFD, Deputy President
Deputy President, B J McCabe

Date:31 October 2018
Place:Brisbane

1.The applicant’s objection be allowed in part.
2.The matter be remitted to the respondent for reassessment of the Shortfall Penalty Assessments dated 23 March 2016 on the footing that the Base Penalty Amounts should be worked out on the basis that the shortfalls resulted from a failure on the part of the applicant and its tax agent to take reasonable care to comply with a taxation law but with no remission of the resultant penalties.
3.Save as aforesaid, the respondent’s objection decision be confirmed.

...............................[sgd].........................................
The Hon Justice J A Logan RFD, Deputy President
Presiding Member
CATCHWORDS
TAXATION – Goods and Services Tax – taxable supplies – operation of brothel by taxpayer – whether separate supplies of sexual service by sex worker and room hire by brothel operator – payment in gross by client to brothel operator of fully inclusive price and without prior notice of any separate allocation – A New Tax System (Goods and Services Tax) 1999 (Cth), s 9-5. HELD - Single supply of sexual service by brothel operator in its room.
TAXATION – shortfall penalties on Goods and Services Tax net amounts – whether conduct of taxpayer and its tax agent resulting in shortfall a failure to take reasonable care or reckless – incongruity between taxpayer’s aspirational business model and its implementation leading to making of single rather than separate supplies – absence of gross indifference to taxation consequences – Taxation Administration Act 1953 (Cth), Sch 1, ss 284-75, 284-80 and 284-90. HELD – failure to align implementation with aspirational business model and related Goods and Services Tax shortfall consequence the result of a failure to take reasonable care by taxpayer and its agent.
TAXATION – Pay As You Go remission obligations – operation of brothel – failure by operator to seek Australian Business Number or tax invoices – penalty for failure to withhold PAYG amounts – whether operator obliged to withhold amounts – Taxation Administration Act 1953 (Cth), Sch 1, ss 12-190, 16-30. HELD – operator obliged to withhold amounts and liable to administrative penalties.
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 (Cth)
Administrative Appeals Tribunal Act 1975 (Cth)
Migration Act 1958 (Cth)
Taxation Administration Act 1953 (Cth)
CASES
ATS Pacific Pty Ltd v Commissioner of Taxation [2014] ATC 20-449
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424
BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347
Case U26 (1999) 19 NZTC 9243
Harrison v Commissioner of Taxation 2010 ATC 10-129
Howard v Commissioner of Taxation (2012) 206 FCR 329
Hua-Aus Pty Ltd v Commissioner of Taxation 2008 ATC 10-058
Minister for Immigration and Citizenship v SZIAI (2009) 83 ALJR 1123
Minister for Immigration and Citizenship v SZMDS (2010) 240 CLR 611
Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259
Minister for Immigration and Multicultural Affairs v Eshetu (1999) 197 CLR 611
Picton Finance Limited v Commissioner of Taxation [2013] AATA 116
Sullivan v Civil Aviation Safety Authority (2014) 226 FCR 555
Sun v Minister for Immigration and Border Protection (2016) 243 FCR 220
REASONS FOR DECISION
The Tribunal:
31 October 2018

The applicant, HKYB is a proprietary company which carries on business in Australia in its capacity as trustee of The Dog and Duck Equity Trust. It operates a brothel in Brydges Street (on the corner of Drury Lane), Covent Garden.
As with those assigned in the preceding paragraph, the names which we adopt for the applicant, the Trust, the establishment and the various persons to whom we refer in these reasons are pseudonyms. That is because, as its right under the Taxation Administration Act 1953 (Cth) (TAA), the applicant sought that its review application be heard in private. The hearing was so conducted. In keeping with the applicant’s request, it is incumbent upon us to formulate our reasons in a way that will preserve its anonymity. We consider that, in the circumstances of this case, just to use a pseudonym for the applicant and not otherwise would not achieve the statutory purpose of privacy if requested in the review of a taxation objection decision. That consideration, and others, earlier moved us to make particular orders under s 35 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act).
At the heart of this review are questions as to how the sexual services provided to clients at its brothel known as “The Cytherean” over the period from 1 July 2013 to 30 June 2015 (Relevant Period) are to be characterised:
(a)under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act) for the purposes of goods and services tax (GST); and
(b)under Sch 1 to the TAA for the purposes of the collection and recovery of pay as you go (PAYG) tax instalments?
There are also separate, but not unrelated questions, in relation to liability to administrative penalties and, if so, whether and to what extent these ought to be remitted.
The review has its origins in an audit of the applicant’s taxation affairs, unannounced to the applicant, by the respondent Commissioner of Taxation (Commissioner) during its conduct. This audit was concluded on 23 March 2016. On that date, the Commissioner made, and issued to the applicant, notices of, various assessments and amended assessments. These assessments comprised:
(a)Amended assessments of net amount for each of the quarterly tax periods during the Relevant Period, totalling $1,748,224 (GST Assessments);
(b)Related assessments of shortfall penalty for each of the quarterly tax periods during the Relevant Period, totalling $1,025,596.20 (Shortfall Penalty Assessments); and
(c)Assessments of penalty in respect of a failure to withhold PAYG amounts for each month in the Relevant Period, totalling $4,855,571.40 (Failure to Withhold Penalty Assessments).
The applicant objected to each of these assessments on 23 May 2016. On 3 February 2017, the Commissioner informed the applicant of his decision in respect of its objection. By his objection decision, the Commissioner:
(a)disallowed in full the objection against the GST Assessments;
(b)disallowed in full the objection against the Shortfall Penalty Assessments; and
(c)allowed the objection against the Failure to Withhold Penalty Assessments in respect of so much as related to the month of July 2013 but otherwise disallowed that objection.
The applicant has sought the present review of that objection decision.
The detailed manner of operation of The Cytherean during the Relevant Period is controversial. It was the subject of both oral and documentary evidence to which we shall shortly refer. Considered at a more general level of abstraction, some facts as to the operation of The Cytherean and of the applicant’s acquisition of it are not controversial. As to the uncontroversial, the material before us enables us to make the following findings of fact.
In June 2013, the applicant acquired the brothel business presently known as The Cytherean from Flower Seller Pty Ltd. That same month, the applicant, as assignee, entered into a separate agreement with Moll King’s Pty Ltd, as assignor, for the assignment to it of the business name, “The Cytherean”.
Over the Relevant Period, the applicant’s principal business activity was the operation of The Cytherean at Brydges Street, Covent Garden. Briefly, over this period, the applicant also operated an escort service from the brothel but a separate company was then formed to conduct this operation.
The building that housed the brothel over the Relevant Period had previously undergone alteration and additions to secure local government development approval. The alternation and additions resulted in a purpose-designed brothel. It has four levels. These and the facilities located on the respective levels are as follows:
(a)basement – carpark, walk-in cold room, storage facilities and major laundry facility;
(b)ground - a reception desk/cashier office area, auto-teller machine (ATM), manager’s office, foyer with internal staircase, 10 private waiting rooms, bar and client lounge, security office, one bedroom (purpose designed for disabled clients), toilet facilities and a “Ladies’ Area” (an in-house term) comprising staff grooming (hair and makeup), kitchenette, lounge area and related amenities;
(c)level 1 - 13 bedrooms, some of which can be interconnected so as to provide a larger room and, separately, an office; and
(d)level 2, - five larger, “VIP”, “themed” bedroom suites, together with a smaller laundry area.
In all, there are (and were during the Relevant Period) nineteen bedrooms in the brothel. It is in these rooms that the sex workers physically provide sexual services to clients attending the brothel.
We have deliberately used the adverb, “physically”, because an issue of central importance is whether, for GST purposes, it is the applicant or the sex worker who supplies the sexual service. For the purposes of the GST Act, a taxable supply is made if, materially, “you make the supply for consideration”: s 9-5(a), GST Act. As to the GST assessments, the applicant’s case and the means by which it seeks to demonstrate that those assessments are excessive is that it does not supply that sexual service, only the facility where that service is conducted. The supply for GST purposes of the sexual service is said to be by the sex worker. The Commissioner’s GST assessments are premised on there being a single supply by the applicant of a sexual service to a client in a room at its brothel. Resolution of these competing positions entails a question of characterisation as to what, on the facts, is the “supply” or “supplies”? Indeed, that may put the position too highly, given the onus of proof which falls on the applicant.
Each of the bedrooms in the brothel is outfitted to a high standard, akin to that of a luxury hotel. Each has a separate bathroom and a minibar from which a client can, for a charge, purchase from the applicant soft drinks or alcoholic beverages. Some rooms have an in-room spa.
The 10 private waiting rooms on the ground floor are a matter of deliberate design. Each has an identifying letter. The alphabetical designation allows an individual client efficiently to be directed to a particular waiting room after entry to the premises. Their purpose is to enhance privacy and discretion in the provision of services at the brothel. The aim is to ensure that it is possible for a client to enter and leave the premises without other clients becoming aware of that particular client’s attendance. Equally though, there is a small bar area on the ground floor at which, occasionally, VIP clients are served drinks. Further, sometimes, clients attend there as a group. Of these some, in turn, will request, and will in due course be provided with, a group sexual experience.
Entry to the premises by clients is via a ground level front door that faces on to Drury Lane. That door is kept locked and is under video-camera surveillance. It is able to be opened electronically by a staff member at reception. There is a separate, staff only, entry door on Brydges Street, access to which is also controlled from reception.
Save for Christmas Day, The Cytherean operated on a 24 hour/seven days a week basis during the Relevant Period. To enable this continuous operation, the applicant employed about 18 staff at any given time (sex workers, whose status is controversial, aside). These comprised a General Manager, receptionists (some cross-trained as cashiers but, if acting as such, separately rostered), cashiers and laundry staff. Sometimes, an administrative assistant and a maintenance man augmented this staffing composition. General Manager apart, all such staff were engaged on a casual basis.
On and from about 7 July 2014 and to date, the General Manager has been Ms Charlotte Hayes. In December 2014, Ms Hayes became a Director of the applicant at the request of its owners. Ms Hayes’ predecessor as General Manager was Ms Mary Holland.
Ms Hayes gave affidavit and oral evidence at the hearing, as did three other employees or sometime employees of the applicant – Ms Lenora Norton, Ms Harriet Powell and Ms Elizabeth Armistead. Each of these other employees had experience of reception and cashier duties and other operational procedures at The Cytherean over some of the Relevant Period. Neither they nor Ms Hayes had ever made any observation of dealings, financial, sexual or otherwise, between a sex worker(s) and a client after the latter had entered one of the bedrooms with that sex worker(s). We include the plural alternative in relation to sex workers because, sometimes, more than one sex worker would, on request, service a client or clients in a particular room at the brothel. Affidavit evidence was also given by a Ms Fanny Murray, a casual receptionist who was later trained in and as required undertook cashier duties. She did not commence employment until January 2016, which is after the Relevant Period. For that reason, we have not gained assistance from the evidence that she gave concerning practices and procedures at The Cytherean.
The Commissioner called Ms Armistead, although the applicant placed reliance upon answers that she gave in an examination under statute earlier conducted by the Commissioner.
Some controversy attended the reception of Ms Armistead’s evidence, including her answers when under examination. It transpired that one of Ms Armistead’s affidavits had been made after she had been supplied with affidavits filed on behalf of the applicant. As a result, she had come to know Ms Hayes’ true name (Ms Hayes works under a pseudonym at The Cytherean). That was not on her initiative, but rather the result of an unfortunate lapse by the Commissioner and his solicitor (not counsel) in giving sufficient attention to interlocutory orders made under s 35 of the AAT Act. The resultant affidavit in reply made by Ms Armistead does contain relevant information. In order to make sense of Ms Hayes’ affidavit, it would always have been necessary for Ms Armistead at least to have been supplied with Ms Hayes’ work pseudonym. In our view, the reception of this part of Ms Armistead’s evidence is not precluded by the Commissioner’s lapse. Further, whether or not to institute proceedings under s 63 of the AAT Act against those who made the disclosure in breach of the interlocutory order is a matter for the Attorney-General as the Minister administering that Act. Unlike a court, the Tribunal does not itself have a power to punish persons for contempt. Rather, the reception of this part of her evidence was, at most, a matter for the exercise of a discretion. Insofar as any discretion is entailed, that is resolved in this instance by balancing the relevance of the information in her reply affidavit with what seemed to us to be an inadvertent lapse the effects of which could be addressed by reminding Ms Armitage about non-disclosure obligations. In our view, that favoured the reception of the affidavit as evidence.
We make reference below to the position in relation to the answers given under examination.
Another person who gave affidavit and oral evidence was Mr Samuel Derrick, an accountant whose firm provided accounting services to the applicant over the Relevant Period.
There were usually two laundry staff on duty at The Cytherean at any given time. During daylight hours and once again aside from sex workers, there were usually two other staff at the premises, each in the reception/cashier office area on the ground floor. Between them, these two staff undertook cashier and reception (including telephone reception) duties.
During the Relevant Period, a notice board within the Ladies Area of The Cytherean prominently displayed a number of what were termed, “House Rules”. These “rules” were directed to sex workers. They were highly prescriptive as to a dress code, an advance notification obligation in respect of non-attendance for rostered duty, general conduct and conduct (performance of a sexual service apart) within a room. The notice alerted sex workers to a “no show” fee of $200 and to the prospect of a fine of $50 for not wearing stockings. Ms Hayes acknowledged in her oral evidence that these “rules” were not really for show. We rather thought that it entailed some dissembling by her when she asserted that these rules were “inherited”. She agreed that the rules had remained on the notice board throughout the Relevant Period but asserted that they were not strictly enforced. It may well be that there was some difference in enforcement policy as between Ms Hayes and her predecessor, Ms Holland. Further, we are prepared to accept Ms Hayes’ explanation that the ultimate sanction for a breach of the “rules” is prevention by the applicant of attendance by a sex worker at The Cytherean. Likewise, Ms Hayes’ further statement that instances of a breach of the rules were “quite rare” struck us as inherently probable, given that ultimate sanction. The applicant’s “House Rules” were consistent with its business purpose of operating a high-class brothel. Inferentially, there were advantages to sex workers in working there and conforming with the applicant’s rules.
During the initial 12 months of her appointment, Ms Hayes worked extended hours, gaining an understanding of the operation of the business and implementing systems of operation. Thereafter, Ms Hayes’ general practice was to work in her office during daylight hours, although she did step in from time to time in a busy period to undertake front of house reception duties. During the evening, and once again aside from sex workers, there were between three to five staff rostered on duty, a dedicated cashier and two to four reception staff.
All reception or cashier staff were uniformed (or uniformly dressed in black dresses) with a high standard of dress and grooming expected by the applicant. This was in keeping with the high standard of internal fit out and maintenance at the brothel. In turn, this reflected a deliberate policy of the applicant throughout the Relevant Period of projecting itself to the world at large as a high-class establishment.
In addition to the staff mentioned, the applicant engaged contract cleaners to clean a room after it had been used for the provision of sexual services and to prepare and ready that room for subsequent use. A system was in place that allowed staff in the cashier area readily to identify on a panel which rooms were available, in use or being cleaned, as well as to identify the time remaining for a particular client in a particular room. The panel was mimicked to the area where the contract cleaners were based. They, too, were required to monitor the panel so as promptly to identify rooms that required to be cleaned after use.
The applicant also engaged a security contractor to provide a guard who was stationed at the back door of the brothel from 7:00 pm until 6:00 am daily. Other internal security measures included security camera coverage, monitored from reception of all common areas inside the brothel (none were deployed in bedrooms) and an intercom as between each bedroom and reception.
Over the Relevant Period, the applicant had in place a standard or routine practice on and from the entry of a client into the brothel. That is not to say it was invariable. Further, there was, so we apprehended the evidence, some variation responsive to the notification of the Commissioner’s assessments. It is not necessary to detail the latter, because that variation fell outside the Relevant Period. At least nominally, some controversy attended the precise detail of the routine practice during the Relevant Period.

Before describing the practice, it is as well to make some observations about the affidavit, oral and documentary evidence before us which bears both on the practice at the brothel in relation to clients and also on the applicant’s internal accounting and promotional practices during the Relevant Period and to governing principles in relation to evidence in this proceeding. Especially that is so because each of the parties came to make detailed objections to particular passages in the affidavit evidence tendered by the other. Further, the Commissioner, oddly, with respect, at least at first blush, took objection to the reliance by the applicant upon passages in the examination that he conducted of Ms Armistead.
The answers given under compulsory examination were relevant. It is true that the applicant was not afforded an opportunity to put its own questions to examinees but that absence of opportunity was not seen by the applicant as adverse to its interest in tendering the answers. Further, any unfairness to either party in the answers was addressed by the calling to give oral evidence of the examinee. That aside, submissions as to the stage of investigation informing the questions posed in examination were ones which went to the weight to afford the answers, not whether or not they were relevant.
Yet further, the Commissioner took objection to any evidentiary reliance by the applicant upon an audio-visual documentary about The Cytherean that formed part of the material before us. That documentary includes not only footage taken inside the brothel but also interviews with some sex workers, transcripts of which also form part of the material before us.
First and foremost, care must be taken in the understanding of what may constitute “evidence” in an administrative review proceeding such as the present. That is because s 33(1)(c) of the AAT Act provides, “the Tribunal is not bound by the rules of evidence but may inform itself on any matter in such manner as it thinks appropriate”.
The prescription found in s 33(1)(c) of the AAT Act is neither unique to that Act nor to our times. All of this is made apparent, in relation to an analogue found in the Migration Act 1958 (Cth), in a helpful historical survey by Flick and Rangiah JJ (with whom Logan J generally agreed) in Sun v Minister for Immigration and Border Protection (2016) 243 FCR 220 at [56] to [60]; see also Sullivan v Civil Aviation Safety Authority (2014) 226 FCR 555 at [92] to [97] per Flick and Perry JJ (Sullivan).
Paragraph 33(1)(c) of the AAT Act, in turn, forms part of a suite of measures found in s 33 of that Act which distinguish the Tribunal as an emanation, albeit an institutionally independent emanation, of the Executive from a court exercising judicial power. Another distinguishing feature, of course, flowing from s 43 of the AAT Act, is that the “core function” of the Tribunal is that of review: Minister for Immigration and Citizenship v SZIAI (2009) 83 ALJR 1123 at 1127 (SZIAI); Sullivan, at [5]-[6] and [60]. In this case, that means sitting in place of the Commissioner so as to review the objection decision. In turn, that particular role means that not all of the general observations made in SZIAI about tribunal review or in Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 at 282 as to the differences between an administrative review forum and a court exercising judicial power can be applied uncritically. Notably, in the context of this particular review, the observation that a term “onus of proof” is “borrowed from the universe of discourse which has civil litigation as its subject” is inapplicable. That is because s 14ZZK(b) of the TAA does expressly cast an onus of proof on the applicant, the onus of proving the assessments to be excessive. Therefore, it was for the applicant, not the Commissioner, to place before us some material that not just permitted but also persuaded us to make findings leading to a conclusion that the assessments were excessive.
The other measures found in s 33 of the AAT Act are that the Tribunal’s procedure “is, subject to this Act and the regulations and to any other enactment, within the discretion of the Tribunal” (s 33(1)(a)) and that the Tribunal is exhorted to conduct its proceedings “with as little formality and technicality, and with as much expedition, as the requirements of this Act and of every other relevant enactment and a proper consideration of the matters before the Tribunal permit” (s 33(1)(b)). Of such measures, Gleeson CJ and McHugh J observed, in Minister for Immigration and Multicultural Affairs v Eshetu (1999) 197 CLR 611 at 628 observed:
They are intended to be facultative, not restrictive. Their purpose is to free tribunals, at least to some degree, from constraints otherwise applicable to courts of law, and regarded as inappropriate to tribunals. The extent to which they free tribunals from obligations applicable to the courts of law may give rise to dispute in particular cases, but that is another question.
In this particular case, the evidentiary objections went to the hearsay quality of certain statements in affidavits and also to what were said to be passages where opinions or arguments were voiced by deponents. Given s 33(1)(c) of the AAT Act, hearsay material is not, in itself, inadmissible but, necessarily its weight, may be affected by the inability of the party against whom it is tendered to test by cross-examination the firsthand source of the information. We understood the parties to accept this. The hearsay objections really sound a cautionary note about the weight to afford such statements. We have borne this in mind when considering such statements. Opinion evidence may be just as admissible in the Tribunal as in a court if based on a specialist body of knowledge or experience. Equally, it may be subject to an identical and fatal flaw if it lacks any factual foundation. That was certainly the case in relation to mere assertions, by those who had never then been present, as to what transpired in a bedroom as between sex worker and a client. That is not to say that it is impermissible to draw inferences as to the likelihood that established practices were followed. Argumentative passages are inherently of no probative worth, each of the provisions in s 33 of the AAT Act notwithstanding.
Thus, notwithstanding the objections taken by the parties we received each of the affidavits tendered as part of the evidence before us. We did so subject to treating the material subject to objection in the manner just indicated in respect of a particular type of objection. As to the transcript of the compulsory examination, given s 33(1)(c) of the AAT Act, it is not inadmissible in evidence. The point taken in objection by the Commissioner was really a submission as to its weight. His point was that the questions asked were informed by the material then available to the Commissioner about the operation of The Cytherean and the answers given must also be read in that light. We have done this.
The documentary, including what is said by the sex workers in it, is admissible but none of these persons was called for cross-examination. That is highly relevant to, and diminishes, the weight to give to what is said by such persons. Though we have viewed the documentary and considered the transcripts of what is stated by the persons interviewed, we have not gained much assistance from either in resolving the question as to whether the assessments concerned have been proved to be excessive. The imagery in the documentary did enhance our understanding of the fit out of the premises but the statements of interviewees were no substitute for practices and representations as revealed by contemporaneous documents.
The overarching requirement is that we are obliged to act on material that is logically probative of particular facts: Minister for Immigration and Citizenship v SZMDS (2010) 240 CLR 611; Sullivan, at [97].
The periods of employment of the witnesses who gave evidence as to procedures at The Cytherean did not completely coincide. Of those required for cross-examination the nature and periods of their employment were as follows. That of Ms Hayes we have already mentioned.
Ms Norton was first employed there in about 2006 as a receptionist. She was then about 19 years old. At that time, Ms Holland was managing the business. It was then that Ms Norton first encountered Ms Hayes, who was then employed at The Cytherean as a supervisor. However, Ms Hayes left The Cytherean for a time shortly thereafter. Ms Norton remained employed at The Cytherean until about 2008 when she left to take up employment as a Day Manager at another brothel. She returned to The Cytherean at Ms Hayes’ request in about October 2014 to take up an appointment as a receptionist. She was cross-trained as a cashier and also worked regularly in that capacity until mid-2015. In October 2015, Ms Norton applied for and towards the end of 2015 obtained a position as supervisor at The Cytherean. This formalised a role that she had been undertaking in any event earlier in 2015. Ms Norton remained employed in a supervisory capacity at The Cytherean at the time of the hearing.
Ms Powell commenced duty as a casual receptionist in January 2014. She, too, was cross-trained to undertake, and did undertake, as required, cashier duties. She remained so employed at The Cytherean at the time of hearing.
Ms Armistead commenced duty as a casual receptionist at The Cytherean in about September 2009, during the time when Ms Holland was the manager. Within a year after her commencement, she assumed the role of supervisor, in succession to the previous incumbent. She remained in that role until ceasing employment at The Cytherean in about September 2014. For the whole of her period of employment, Ms Armistead worked night shifts.
On the evidence, a supervisor was not just the senior receptionist but also, in the absence on duty of the Manager, the senior staff member on duty at The Cytherean on a particular shift, tasked with ensuring that operations of the brothel ran smoothly over that period. That could entail a variety of tasks which, as put by Ms Norton, we find were:
(a)acting as point of contact for reports concerning and dealing with breakages and equipment (for example a television) maintenance at the premises;
(b)dealing with any issues of concern relating to a sex worker on shift; for example, where it becomes obvious that a particular sex worker was intoxicated while seeing clients at The Cytherean;
(c)acting as first point of contact for a sex worker on shift if they have a difficult encounter with a client and want intervention (for example, where the client is drug-affected). Sometimes, a supervisor may have to call for assistance from the on-duty security officer; and
(d)assisting with health or other emergencies that arise during a shift (which may entail calling for an ambulance and assisting as much as possible until the arrival of paramedics with the ambulance).
Reflecting upon their evidence, we consider that such differences of detail as there were in the description of operational practices and procedures at The Cytherean over the Relevant Period as between Ms Norton, Ms Powell and Ms Armistead and, in turn, as between them and Ms Hayes were not a reflection of the reliability of their respective recollections or credibility. Rather, they reflected the experience of different periods of operation of the brothel under (or as) different managers and the undertaking of the duties of their different positions with resultant different perspectives. On the whole of their evidence, we do not consider that the standard or routine operational practice and procedure at The Cytherean in relation to dealing with a client once he (or sometimes, they, or she) entered the premises differed in substance over the Relevant Period. This is why we have referred above to an at least nominal evidentiary controversy. In turn, these practices and procedures were in general conformity with those described in The Cytherean Training Manual (Ex 7 to Ms Norton’s affidavit). It will be necessary to make some additional findings about practices and procedures, based on our assessment of the oral evidence of these witnesses. However, given that the practice and procedure did not differ in substance over the Relevant Period, to set out in detail all of the evidence from support staff would add only to the length of these reasons rather than serving any useful end.
A further observation which we would make about Ms Hayes, based on our close observation of her during her relatively lengthy time in the witness box, is that she was a witness of considerable poise who had an obvious, deep understanding not just of the operation of the applicant’s business but also of the issues which had emerged with the Commissioner, arising from the method of operation of that business over the Relevant Period, following the audit. Both in her affidavit and oral evidence, we thought that her understanding of those issues inclined her to include advocacy for the applicant’s position in her evidence or disinclined her from readily acknowledging facts or propositions adverse to its interest as she saw it. In this regard, a good example was offered by her answer under cross-examination when taken to the wording of the applicant’s website, “I can understand that it’s probably not worded very accurately.”
In our description of procedure, we use the male pronoun, “he”. Most of the clients were male. But the evidence was that The Cytherean did have some female clients who requested and were provided with lesbian sexual services. Further, we also heard evidence that heterosexual sexual services would occasionally be sought by and provided to couples who came to the brothel as clients. There was no evidence that any different procedure was followed in these circumstances, although, as will be seen, the price for any group sexual activity varied from one on one sexual activities. We find that the procedure which was followed as follows.
Once a client was allowed to enter the brothel that client was greeted by the receptionist on duty. The receptionist confirmed that the client wanted to avail himself of a sex worker (and that the client did not have an advance booking for a particular sex worker). The client was then taken to one of the 10 private waiting rooms on the ground floor to which we have already referred. Displayed inside each of the waiting rooms (and also in each of the bedrooms) was a price list. That price list is of quite some significance in this proceeding. We describe it in greater detail below.
Once the client was seated in the waiting room, for example, waiting room A, the receptionist went to the Ladies’ Area. These, she stated to the sex workers present words to the effect, “Ladies meeting in A”. The available sex workers who wished to meet the client then proceeded from there to the nominated waiting room, one at a time, and briefly introduced themselves to the client.
Following this introductory meeting procedure, the receptionist returned to the waiting room concerned. There she asked the client whom he would like to see. The sex worker (inferentially by then back in the Ladies’ Area) that the client chose was then notified by the receptionist. If the sex worker had a negative experience in the introductory meeting and wished not to see the client it was then that she so advised the receptionist who then returned to the client and invited him to make another choice. Such advices to the receptionist by a sex worker were unusual. Usually, the sex worker just returned to the waiting room and escorted the client back to the reception area in order to be allocated one of the 19 bedrooms.
The sex worker then accompanied the client to the allocated room (clients generally did not have a say as to the particular room that they were allocated, but occasionally regular clients called up in advance and requested to book one of the VIP suites on level 2 for a longer booking).
We did not have any evidence from a sex worker as to the procedure followed once she and a client entered the allocated room. However, the evidence as to the practice expected of a sex worker at The Cytherean was that, once in the room, the sex worker would conduct a health check of the client’s genitals using a lamp available for that purpose. Ms Hayes had observed sex workers informing the receptionist of a failed test and also, less frequently, a sex worker asking the receptionist to request another sex worker to examine the client, which is referred to as "a double check". She had also observed a client leaving the premises after being taken first to the allocated room and, inferentially been informed by a sex worker that this was because of a failed health check. It does seem inherently likely from these particular observations made by Ms Hayes and the existence of an expected health check practice that this practice was, at least generally, followed over the Relevant Period. We find accordingly.
Based on Ms Hayes’ observations, we also find that, occasionally, a sex worker might, after entering an allocated room with a client, return to reception and advise the receptionist that she did not wish to continue seeing that client. Reasons given for this varied but included a request for a type of service that the sex worker was unwilling to provide or that a particular client’s penis was too large. There is a hearsay quality to this evidence, but it does not strike us either as inherently incredible, or unfair to the Commissioner, to act on it.
The particular service required by a client was settled in the allocated room (provided there was no negative health check). That was a matter of established practice. Neither the manager (if on duty) nor any member of reception staff or the cashier was privy to the discussion about this subject. The result though was made known to the cashier immediately after it was concluded. That was because, invariably, the client was required to pay in full before any service was provided. If the client paid by cash, the total agreed amount was handed to the sex worker who, in turn, took that to the cashier, while the client stayed in the room and began to undress and shower. Once again, as to what transpired before the money was taken to the cashier, there is a hearsay element in the accounts (principally from Ms Hayes) but it seems to us inherently likely and credible. If the client wished to pay in cash but did not have sufficient cash to hand, he accompanied the sex worker to the on-premises ATM, withdrew the amount and gave it to the sex worker who, in turn, gave it to the cashier. We base this finding on what we take were Ms Hayes’ observations and also her experience (if acting as receptionist or cashier) of this practice at the brothel over the period she has been the manager.
The practice followed in relation to credit card payments changed (prior to the Relevant Period, as we understood the evidence) as a result of the introduction of personal identification numbers (PIN) for credit cards. In the Relevant Period, the practice was that, if the client were paying by card, the sex worker accompanied him to the cashier area where the credit card terminal was located, to enable him to enter his PIN number. Inferentially, only after the credit card payment (into an account maintained by the applicant) was confirmed by this entry did the sex worker and client return to the allocated bedroom.
At the time when the sex worker handed the cash to the cashier or, as the case may be, the credit card payment was processed, the practice was that the sex worker informed the cashier for how long the room was going to be used and either the service that was to be provided or the amount of any “tip” a client wished to pay a particular sex worker. Ms Hayes had personal experience, during the Relevant Period, of hearing sex workers from time to time announcing to the cashier, and handing over, a particular amount plus a tip of a specified sum. A “tip” was an amount over and above the fee notified in the price list displayed in a waiting room or a bedroom. We give details of the frequency of occurrence of this practice below in the course of further considering the job sheets. For the moment, it is enough to state that we accept that the practice at The Cytherean was that any tip was not “split” with the applicant by a sex worker.

In turn, the cashier entered these details into a “job sheet” which it was her responsibility to maintain. The job sheet records the amount of the payment and also a “split” as between the applicant and the sex worker concerned. The “splits” for various items as between the sex worker and the applicant were shown on a sign called the “cashier’s price list” which was displayed in the cashier area. An example of such a cashier’s price list was in evidence (at Tab 27 to Ms Hayes’ principal affidavit). Looking at that example cashier’s price list, it does not have the appearance of a document intended to inform clients of any “split”. There was no evidence that it was shown to or drawn to the attention of a client before payment was made.
As mentioned already, there was a price list on display for the clients in each waiting room and in each bedroom. That price list is to be found in evidence at:
(a)tab 13 of Exhibit “1” to the affidavit of Ms Hayes, affirmed on 31 May 2017; and
(b)annexure “1” to the affidavit Ms Armistead, sworn on 10 August 2017.
During the Relevant Period, that price list was entitled with the name The Cytherean with a subscription under that establishment and business name describing it as a type of “short stay hotel”. But the rates specified on the price list did not differentiate at all between the cost per hour or otherwise of a room at the premises and the cost of a service which could be offered in that room. Rather, “grossed up” amounts were specified in that list. The only separate identification of services on the price list relates to what one might term the non-standard (e.g. “Lesbian Doubles”, “Fantasy” or “Swapping”) or “extra”. The price list notified the following to clients:
½ HOUR       $250
¾    HOUR     $340
1     HOUR     $400
1½ HOURS   $600
2     HOURS    $800
every booking of 2hrs+
COMPLIMENTARY SPA
1 HOUR COUPLES
CHOICE OF LADY, COMPLIMENTARY CHAMPAGNE & SPA    $700
SPA     $20
FANTASY      $50
Uniforms, nurse, school girl) policewoman. Light B&D, toys.
LESBIAN DOUBLES per lady         $80
SWAPPING    per lady         $90
KISSING        $50
VIEWING       $20
[sic]
At the foot of this price list, the following appeared over the Relevant Period:
We accept all credit cards
A 10% surcharge applies to all credit card transactions
Complimentary ATM and EFTPOS facilities. Prices are strictly not negotiable.
[sic]
We do not accept the applicant’s submission that nothing turns on the price list displayed at the premises. This price list was, in our view, a representation by the applicant to clients as to the services it would supply for given prices at its premises. They were the applicant’s prices. The services identified in the price list are “grossed up”. What we mean by that is that there is no representation of separate amounts payable to separate persons in respect of the use of a room and the services of a sex worker in that room. The relevant price for the service includes the use of the room in which the service is to be provided, and that price is payable to the applicant (hence “We accept”). The “we” mentioned at the foot of the price list is, self-evidently, the applicant, not a particular sex worker. As will be seen, the representations in the price list by the applicant were congruent with those it made on its website during the Relevant Period.
It is highly unlikely, so we find, that any client would, during the Relevant Period, have been disabused by the applicant’s reception staff of the understanding, generated by the price list on display, that one all-inclusive price was to be paid. That is because the applicant’s “Reception Training Manual” contains, underneath details of generally applicable prices, this statement in bold type:
PRICES – The clients do not need to understand our internal breakdowns.
That unlikelihood is underscored by a review of a sample of the job sheets, as referred to below. These record internal breakdowns but these relate to payments received in gross.
The price list also signals to the client that the prices on the list are “strictly not negotiable”. It may be that one motivation for this wording was for the protection of sex workers from having to “haggle about the price”. Ms Hayes asserted as much in her evidence, attributing the wording to requests made to her from sex workers. This was not corroborated by the evidence of any sex worker, because none was called. But the non-negotiable signal to clients on the price list is not overtly given on their behalf but rather on a price list bearing the applicant’s business name, The Cytherean. The whole get up of the price list is such that the representation is that it is the applicant’s prices that are not negotiable. It is not hard to see how the applicant also had an interest both in terms of maximizing its income and in the promotion of orderly behaviour at its premises in signalling that prices were not negotiable. Ms Hayes assertion was made after the existence of the audit and related consequential assessment had come to her knowledge. This, we thought, lent a gratuitous quality to this aspect of her evidence. At most, there may have been a coincidence of interest as between sex workers and the applicant in relation to the overt discouragement of price negotiation. However this may be, so far as clients were concerned, the representation about negotiation, as with all elements of the price list was that of the applicant.
Similar observations may be made about the representations on the applicant’s website as it appeared over the Relevant Period and Ms Hayes’ evidence concerning its wording. The representations on the “FAQS” pages (inferentially, “frequently asked questions”) are instructive as to what is supplied and by whom.
As a matter of overall impression or “get up”, the FAQ page contains representations to the world at large by and on behalf of the applicant, not sex workers. More particularly:
·In respect of a question, directed to the selection at the premises of a sex worker, the answer given in relation to the procedure uses the possessive pronoun “our” to refer both to reception staff and to the sex workers.
·In respect of a question as to what the rates at The Cytherean include, the answer given is that they are “fully inclusive”, and that they “include the use of one of our … rooms”.
·In respect of a question about payment facilities, the answer given is that The Cytherean accepts cash, has an onsite ATM and accepts credit cards (subject to a nominated surcharge). The answer is replete with the repeated use of “we”.
·In relation to a question about what are described as “extra services”, the answer given again uses the possessive pronoun “our” in relation to sex workers many of whom it is stated will perform these at their discretion on the day. The prospective client is also informed that there will be an extra charge for these.
We regard the applicant’s website reference to “fully inclusive” as particularly telling against its case that sex workers made a private arrangement with a client for the provision of a sexual service and that there is a separate arrangement with the applicant in relation to room hire.
In relation to “etiquette”, it was stated on a second version of the website published in about March 2015, that “the ladies” had requested that certain “guidelines” be followed. Thus, prospective clients are entreated not to “barter” with the sex workers and informed that there are set prices for special services and that discussion of discounts with them cheapens both parties. Viewed in isolation and out of context, the reference to “both parties” might be thought to support a conclusion that the representation is that it is the sex worker in her own right and not the applicant via the sex worker who provides the service. The same might be said in relation to the reference to discretion in respect of “extra services”. But that is not consistent with the overall impression created by the overall context of the website, including the repeated references to “our” and “we”. The more natural reading as a whole of the website, especially taking account of the “FAQS” pages, is that the applicant represents that it provides sexual services in a room at its premises for an all-inclusive price and affords a discretion to sex workers to exercise on its behalf whether such services will include certain “extras”.
At one stage during the Relevant Period the website also included “our ladies” pages, a modern but in-house version of the notorious Harris’s List (an annual list of local prostitutes published in mid to late 18^th century London), detailing by their working pseudonyms particular sex workers located at the applicant’s premises who wanted their photo posted online. Ms Hayes deposed, and we accept, that this proved difficult and expensive (in terms of photographer cost to the applicant) to maintain with the result that the applicant came just to use a mixture of photos of sex workers who wanted their photo posted and generic, “stock” photos on the website.
The website also included a “Work at The Cytherean” section directed both to prospective reception staff and to prospective sex workers. We consider that the title of this section and the statements made under it are, at best for the applicant, neutral as to the status of those encouraged to work at its premises. If anything, the reference to “clientele” suggests to us that the applicant regarded those who visited its premises for sexual services as its clients and sought so to inform prospective sex workers.
The applicant maintained a roster of sex workers. Ms Hayes stated, and we find, that this roster was available on its website. The sex workers did not separately advertise.
Another method by which the applicant promoted its business was by offering guided tours to the concierge staff of selected hotels. Ms Hayes described this practice in her evidence and identified an example of a related promotional invitation. At best for the applicant, in terms of discharging its onus of proof, that it conducted such activities was neutral as to what it supplied. If anything, the promotion looks more consistent with the promotion of premises where the applicant will supply sexual services than just premises where sexual services are supplied by others.
Ms Hayes also identified in her evidence (Tab 14) a later version of the price list, implemented and displayed on and from about 1 July 2016. This uses a different wording (notably, “Recommended prices for services” with an indication that these have been provided by the “service providers” and that “services are payable in two parts”). Inferentially, the recasting of the wording of the price list was responsive by the applicant to its then recent experience of having been assessed by the Commissioner. We expressly refrain from making any observations as to the efficacy for any taxation related purpose of the redrafted price list. The redrafted list does not relate to the Relevant Period. We take the same position in relation to the reworded (Third Version) of the applicant’s website.
Further, so far as any GST and PAYG responsibilities are concerned, we expressly refrain from drawing any inference adverse to the applicant from the fact that it chose to redraft its price list (or its website) after disclosure of audit and related assessment. In deciding whether it has shown the assessments to be excessive, what is relevant is the nature of the supply and whether the applicant’s relationship with the sex workers brought it within a class subject to PAYG withholding and remittance obligations, not its motivations. At most, that it chose to redraft its price list (and website) might be relevant to the reasonableness of its position in relation to GST and PAYG obligations beforehand..
The material before us included bundles of job sheets in respect of the Relevant Period. The parties devoted some effort to summarising and analysing their contents. We discuss this in detail below. For the present, we make the following findings about them, in supplementation to those already made. These findings are based principally on Ms Hayes’ evidence and also agreed facts about how these are created and their use. Once payment by cash or credit card was effected these details were recorded by the cashier in an internal accounting document of the applicant known as a job sheet. The cashier also then input the amount of time that the relevant room (and thus sex worker) had been booked into the applicant’s computer system. One feature of this was to commence a timer to run for the amount of time that has been booked. This was linked to the display panel mentioned so as to show which rooms were in use, which sex worker was in which room and how much time was remaining on the booking. The material before us included a photo (Tab 28 to Ms Hayes’ principal affidavit) of the screen of this computerised panel display while in use in 2017. We understood it to be common ground that the photo depicted a panel display typical of the Relevant Period and so find.
If made in cash, the total payment made by the client was held by the cashier until the end of the particular sex worker’s shift. At the end of that shift the “split” total to which the sex worker was entitled for that shift was paid to her in cash. The applicant asserted that each cash payment paid by a client was held on behalf of the sex worker concerned until then but this was controversial. We accept Ms Hayes’ evidence that, for security reasons, it was not advisable for the sex workers to carry with them what might in total be a relatively large amount of cash paid by the various clients serviced during a particular shift. But if a sex worker were to hold the cash it would also mean that the applicant did not have control of those funds, which necessarily included (but unknown to the client, so we find) an amount which was its part of the “split” as agreed between it and the sex worker concerned. So it was always in its interest to hold all of what was paid in cash. Ms Hayes also asserted that another reason why cash was held in gross was that it was not possible for sex workers themselves to accept credit card payments, so that, by holding all cash, the applicant, inferentially, had sufficient cash on hand to pay a sex worker in cash the total of the agreed “split” at the end of that sex worker’s shift. This also made sense to us. We accept that this was an additional reason. In reality, the motivations for the applicant’s holding all cash paid over until the end of a shift were multi-factorial. But the reality was that the applicant maintained control of all cash until it chose to pay a portion over to sex workers rostered on a given shift. Another, more telling reality was that the practice and procedure at The Cytherean over the Relevant Period did not entail any arrangement between the applicant and clients whereby the client requested and the applicant agreed to hold any part of either a cash or credit card payment in trust for the sex worker who was to provide the service to that client. So far as clients were concerned, the whole point of the displayed price list was that they were given to understand that they were making an all-inclusive payment to the applicant for a sex service in a room. Further, in light of our findings about the website, had a prospective client consulted and read it, no different impression would have been created over the Relevant Period. The “split” was but an internal arrangement between the applicant and each sex worker. There is no reason to doubt that the practice described in the applicant’s training manual was followed over the Relevant Period, “PRICES – The clients do not need to understand our internal breakdowns.”
What was not controversial was that, during the Relevant Period, the applicant did not seek from, and in any event was not provided with by, any sex worker with an Australian Business Number allocated by the Commissioner to that person. Further, no deduction was made by the applicant from any cash payment of an amount referable to pay as you go tax for later periodic remission by the applicant to the Commissioner.
During the relevant period, the practice at The Cytherean was that, when there was 5 minutes left on a booking the cashier would “buzz” the relevant room with the sex worker acknowledging this by responding with words to the effect of, “thank you”. Unless a client wished to extend a booking, this “buzz” also acted as a signal for the client to vacate the room. If the client wished to extend, the practice followed was a repeat of that already described for an initial booking. That meant that, if the extension payment were to be by a credit card, the client needed again to attend at the cashier’s desk so as to process the payment with the cashier.
After a sex worker and client finished in the allocated room, the practice was for the cashier to input into the computer system that the room had been vacated and was in “cleaning mode”. As mentioned, the panel display was mimicked and monitored by on duty contract cleaning staff for whom “cleaning mode” is a signal to clean up the and prepare afresh the vacated room. After completing this task, the cleaners “buzzed” the cashier from the room to advise that the room was clean. In turn, the cashier will input into the system that the room concerned was “OK”. This permitted the reception staff, who also had a panel display to know that the room was ready for fresh allocation, following the practice already described upon the entry of a client to the brothel.
Ms Hayes deposed, and we accept, that the applicant placed great store on the efficient monitoring and responsive conduct of the cleaning of the rooms at Cytherean. We likewise accept that it placed great store on the duty cashier efficiently inputting status data so as to give an accurate indication throughout a shift of the location of particular sex workers in particular rooms and of the availability of rooms.
A plethora of the “job sheets” (in all about 3280 pages) maintained by the applicant’s duty cashier for a particular shift at The Cytherean over the Relevant Period formed part of the material before us. Each job sheet contains four vertical sections, with each section having eight columns, which respectively have the following headings: “Name”, “Room#”, “Girl”, “House”, “In”, “Out”, “Sign” and “M.O.P.”. On the evidence:
·“Name” means the name (which may be a working rather than true name) of the particular sex worker;
·“Room #” means the particular room number at The Cytherean
·“Girl” means the amount payable or “split” to the sex worker from the amount received in gross by the cashier in cash or via credit card from the amount received in gross by the cashier un cash or via credit card;
·“House” means the amount payable or “split” to the applicant;
·“In” means the time when the occupancy of the room commenced;
·“Out” means the time when the occupancy of the room ceased; and
·M.O.P. means Method of Payment. Each completed section has a girl’s name and included in that box are details relating to one or more transactions.
On and from July 2016, the column heading “Hirer” was substituted by the applicant for “Girl” in the relevant job sheet column. Inferentially, this change was responsive by the applicant to the notification of the Commissioner’ assessments and related explanatory correspondence from his office. Like the changes to the price list and to the website, the only possible relevance to the changes to the form of the job sheet after the Relevant Period may be in relation to penalties and their remission.
Each job sheet also has in each section provision for a gross total, deductions or additions from that and a net total.

As to deductions, on Ms Hayes’ evidence, a deduction is an amount that the sex worker concerned is required to pay the applicant (“House”). She asserted that this included “room rental” but we do not accept this. Such a conclusion would be completely at variance with the applicant’s contemporary practice as reflected in its job sheets and with the representations already described on the price list and on the website. The job sheets show a split as between “Girl” and “House” from an amount received in gross by the applicant, not a deduction from a gross received by a “Girl” referable to room rental by her. In fact and in keeping with the representation made to them on the price lists displayed at the applicant’s premises and the representations made in the FAQ ages of the applicant’s website, clients paid an undissected lump sum in gross to the applicant for sexual services in a room at The Cytherean. The evidence does not support a finding that they were alerted in advance of payment even to a prospect that they were separately paying for the short term occupancy of a room and the provision of a sexual service. For that matter, neither does it support a finding that, during the Relevant Period, a client paid the sex worker personally in gross with the sex worker then paying the applicant for the hire of the room concerned and related support services.
We have placed particular weight on the job sheets for a number of reasons. That is not just because they are contemporaneously prepared documents. They were also prepared for the applicant’s own administrative purposes and at a time when it necessarily had no idea that its operations would become the subject of scrutiny by the Commissioner.
The job sheets do corroborate other types of deductions described by Ms Hayes in her evidence. Thus, we find that a deduction was made by the applicant from a sex worker’s “split” of the gross sum it received from a client for a $35 “shift fee”. That “shift fee” was for cleaning and other provisions made for the sex worker by the applicant (which is required to be paid by a sex worker if her total “split” for a shift is $300 or more). We also find that the applicant made deductions for supplies that sex workers purchased from it, for example, sponges, or for dress hire from the applicant’s in-house dress shop or for takeaway food that they have ordered.
Ms Hayes deposed, and we find, that the practice at The Cytherean over the Relevant Period was that, at the end of a sex worker’s shift, the sex worker would attend on the cashier who would tally up the amounts in the “Girl” column of the job sheet for that shift for that sex worker. (From July 2016, this has been labelled the "hirer'' column.) From the gross received by the applicant, the sex worker was then paid in cash the total of the agreed “split”, less any applicable deductions. Ms Hayes deposed, and the job sheets confirm, that sex workers were supposed to sign for the amount received but that cashiers did not consistently require this.
The job sheets were admitted into evidence as part of the material filed by the Commissioner pursuant to s 37 of the AAT Act (T-Documents). The Commissioner’s submissions included a summary of a review conducted of job sheets for six, one-month periods over the Relevant Period. Those months and the related references to where in the T-Documents the job sheets concerned were as set out below:
(a)1 October 2013 - 31 October 2013: T20-860 to T2d-1085;
(b)1 January 2014- 31 January 2017: T45-3314 to T45-3433;
(c)1 April 2014 - 30 April 2014: T45-3696 to T45-3836;
(d)1 August 2014- 31 August 2014: T28-1683 to T28-1874;
(e)1 November 2014- 30 November 2014: T20-1319 to T20-1537;
(f)1 March 2015- 31 March 2015: T46-4510 to T46-4660.
The approach adopted in the Commissioner’s review was to review each transaction against the price list for The Cytherean (the particulars of which are set out above). For the purpose of preparing his summary, the Commissioner reviewed, in all, a total of 720 pages spread over the months chosen, out of a total number of approximately 3,280 pages of job sheets for the Relevant Period. That was for the purpose of identifying the following (collectively, “the review subjects”):
(a)where the amount recorded next to the description “Fantasy” or “Fant” differed from the price set out in The Cytherean price list for “Fantasy” (being $50);
(b)where the amount recorded next to the description “Lesbian” or “Les” differed from the price set out in The Cytherean price list for “Lesbian Doubles”, (being $80);
(c)where the amount recorded next to the description “Swap” differed from the price set out in The Cytherean price list for “Swapping” (being $90);
(d)where the amount recorded next to the description “Kiss” differed from the price set out in The Cytherean price list for “Kissing” (being $50);
(e)where the amount recorded next to the description “View” differed from the price set out in The Cytherean price list for “Viewing” (being $20);
(f)the number of transactions where the description was recorded as “Esc” (“Escort”);
(g)where the amount recorded next to the description “Esc” differed from The Cytherean price for “Escort”, being $600 per hour. (For transactions of more than 1 hour duration, it was assumed that an hourly rate of $600 applied); and
(h)where the description in the “M.O.P” column is described as “credit” and no amount is recorded in the “House” column of the Job Sheet.
The summary is appended as Table 1 to these reasons.
The summary has these features. The Commissioner’s review disclosed that there was a small number of transactions where the total amount recorded in the “Girl” and “House” columns equalled an amount set out on the price list, but no time was recorded in the “In” or “Out” column, or the time recorded did not equal the time set out in the price list for that amount. Those transactions were assumed by the Commissioner to be recording errors and were not included in Table 1. The review also disclosed that there was a small number of transactions where an additional $20 was recorded in the “House” column. Those transactions were been included in Table 1 on the assumption that this amount was for the $20 “Spa” fee referred to in The Cytherean price list. For those transactions, no separate entry of $20 for the “Spa” extra was recorded; rather, an entry of, for example, $220 (where the relevant time for the transaction was 1 hour) was recorded in the House column.
Table 1 as annexed sets out the results of the review in the following columns:
(a)the period reviewed;
(b)the total number of job sheets for each period reviewed;
(c)the total number of transactions recorded on the job sheets for each period reviewed;
(d)the specific T-Document reference number for the job sheet on which a price charged differed from The Cytherean price list; that is, transactions which were identified as satisfying one of the review subjects;
(e)a description of the difference between the Job Sheet and The Cytherean price list;
(f)the number of transactions in the period reviewed which were recorded as “ESC” (escorts);
(g)a description of the difference between the job sheet and The Cytherean price list for the above escort transactions; and
(h)the number of transactions in the period reviewed where “M.O.P.” (method of payment) was recorded as “credit”, but no amount is recorded in the “House” column of the job sheet.
We have reviewed the summary against the evidence. We are satisfied that it is accurate (based on the assumptions in its preparation described). We therefore find as facts each of the itemised matters in the summary in Table 1. The applicant did not suggest that the six particular months from within the Relevant Period chosen for the review and resultant summary did not yield a representative sample.
Overwhelmingly, the review of the job sheets for these particular months showed that it was highly exceptional for there to be any departure from the price list published to the client by the applicant in each waiting room, as reinforced by the applicant by the display of its price list in each of its 19 bedrooms. The review disclosed that, over the six monthly periods selected, 16,639 transactions were recorded of which only seven revealed a base price different to that in the applicant’s price list. That is consistent with the “not negotiable” representation which the applicant made to the client on its price list. So, too, is the absence of any difference in those same six months as between the amount for “extras” in the price list and the amount recorded in the job sheet an “extra”.
Because she was never present in a room, Ms Hayes’ evidence did not and could not go to whatever transpired in one of the applicant’s rooms between sex worker and client before payment was made. But the practice adopted outside that room at The Cytherean during the Relevant Period was within her knowledge and experience. Her oral evidence was that clients were not told an internal breakdown of the price which they paid. We understood from this that it was not the applicant’s practice for clients to be told by her, a supervisor, a receptionist or a cashier at any time prior to making payment that the amount being paid was made up of two separate components, one for the hire of the room and the other for the provision of a sexual service in that room. That evidence was entirely consistent with the representations in the price list and the “fully inclusive” statement on the applicant’s website. We accept her evidence in this regard and find accordingly.
The conclusion which we draw is that the sex workers worked to the applicant’s price list with a degree of downward variation being tolerated by the applicant but highly exceptional and subject always to a standard “split” (unpublished to a client) as between the applicant (the “House”) and a particular sex worker. Having regard to the price list and the job sheets, inferentially all that occurred was that a client requested the applicant, via a sex worker in a bedroom, to make the supply of a particular sexual service in that room, which the applicant, via the price list had represented it would supply for there for its published price. Likewise inferentially, the sex worker concerned, subject to a discretion (rarely exercised) afforded to that sex worker by the applicant, agreed to make that supply in that room with the client then paying the applicant in gross for that service. Even when there was a downward variation, the price was always paid in gross and always to the applicant by the client. The review of the job sheets summarised in Table 1 discloses that there was never a separate payment for a room by a client, only an ex post facto “split” of an amount paid in gross in an undifferentiated way. We find accordingly.
We are fortified in that finding by this additional fact. On the evidence, if ever there was a decision to be made in response to a client complaint and related refund request (and these were uncommon), it was always the applicant, via Ms Hayes or a supervisor, which made any refund decision, not the sex worker.
Relative to the price for the provision in a room of a standard sexual service, the amounts for additional or “extra” services were modest. It is significant that it was the applicant who fixed these prices. There was nothing in the price list to signal to a client that the non-standard service prices would be retained in full by the sex worker(s) concerned. That the applicant as a matter of internal practice did not seek a “split” of amounts paid to it for these services was doubtless attractive to sex workers but it does not mean (as the applicant contended) that it was the sex worker in her own right who provided that service. Rather, our conclusion is that these were but incidents of a supply of a sexual service by the applicant to a client, as was the provision of the room an incident. On most occasions, it was a standard sexual service in a room which the applicant supplied to a client; on some occasions an additional or extra service was supplied but on all occasions it was the applicant which made the supply in an undifferentiated way for an undifferentiated price of both sexual service and room. We are not persuaded that (as the applicant contended) there was a private arrangement between client and sex worker as to the provision of a sexual service and a separate arrangement as between client and the applicant as to a room in which that service would be delivered.
The applicant also put to us a summary of derived from the job sheets. This summary addressed the number of occasions in the same given months in which tips were evidenced in the job sheets concerned. That revealed that for these months, the number of occasions where a tip was recorded was as follows:
(a)1 October 2013 to 31 October 2013 – 246;
(b)1 January 2014 to 31 January 2014 – 149;
(c)1 April 2014 to 30 April 2014 – 137;
(d)1 August 2014 to 31 August 2014 – 251;
(e)1 November 2014 to 31 November 2014 – 227;
(f)1 March 2015 to 31 March 2015 – 236.
A comparison with the total number of transactions for these months as set out in Table 1 discloses, and we find, that the payment of a tip was exceptional but not uncommon. Inferentially, the applicant tolerated the soliciting of a tip by a sex worker but did not choose to make that its standard practice or even to make any reference to tipping. Further, as revealed by the applicant’s summary, there was no standard amount or event pattern in relation to tips. The amount of a tip varied widely, from as little as $5 or $10 to, on one occasion, $750.
A conclusion that it was the applicant which made the supply in an undifferentiated way for an undifferentiated price of both sexual service and room is fatal to the challenge that the applicant made to so much of the objection decision as related to GST.
No client gave evidence. Nor, save to the incidental extent that the documentary included segments where sex workers spoke to camera, did any sex worker give evidence. There were no written contract or contracts into which clients entered. The initial point of contact, either by telephone contact with a receptionist or, if a “walk in” by direct contact with a receptionist was with a member of the applicant’s staff, not directly with a sex worker. It was the applicant’s reception staff at The Cytherean who directed the client to a waiting room on entry, who facilitated the selection of a sex worker and who, via the applicant’s cashier, received payment. Given this and having regard to the applicant’s price list, where within The Cytherean that price list was displayed, its website, that payment was made in gross to it and the position as revealed in the review of sample months of job sheets, the inference is inescapable that the only contract into which a client entered was with the applicant. That contract was for the supply in a room at its brothel of a sexual service. The “manifestation of mutual assent” (Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at [369] per Allsop J (as his Honour then was, Drummond and Mansfield JJ agreeing) was the payment by the client to the applicant of an undissected lump sum and the applicant’s acceptance of that sum prior to the delivery of the requested sexual service in one of its rooms. Here, “the character of a supply made as a result of the performance of the terms of that contract” (ATS Pacific Pty Ltd v Commissioner of Taxation [2014] ATC 20-449 at [29] per Edmonds J, Davies and Pagone JJ agreeing) was a single supply of a sexual service in a room, not two discrete supplies, sexual service and room, by the sex worker and the applicant respectively.
Necessarily, such a conclusion is fact specific. It entails no question of principle, only an application of the GST Act in the circumstances as we have found them. In turn and no less necessarily, cases decided on different facts in relation to the GST or, as the case may be, PAYG position of other entities conducting a sex industry business determine no question of principle. Had, with respect to representations to and dealings with clients, the applicant adopted a different model for the conduct of its business a quite different GST outcome might have ensued. Thus, though we have considered other sex industry cases to which we were referred – Hua-Aus Pty Ltd v Commissioner of Taxation 2008 ATC 10-058, Harrison v Commissioner of Taxation 2010 ATC 10-129 and Case U26 (1999) 19 NZTC 9243 (Case U26) we have derived no assistance from them on matters of principle, only a reminder of a need not to elevate outcomes on particular facts to matters of principle and of the hazard of comparing and contrasting outcomes on particular facts to the detriment of just applying the terms of legislation to the facts found on the evidence in this case.
Acknowledging this hazard but in deference to the reliance placed by the applicant on Case U26, we make the following observations about that case:
(a)there was evidence given by both a sex worker and a client in that case;
(b)tendered in evidence were newspaper advertisements placed by sex workers directed to their clientele advising that they could now be found at a particular establishment (“massage parlour”);
(c)the evidence admitted of a finding that there was a continuing personal relationship between sex worker and client involving repeat bookings with casual, one-off provision of a sexual service being exceptional;
(d)related to (c), it was found as a fact that a sex worker’s clients would follow that sex worker from one establishment to another if she changed the establishment from which she made herself available;
(e)written agreements were made between the sex worker and the client;
(f)the sex worker’s evidence included her stating that her understanding was that she was responsible for GST and other taxation obligations; and
(g)that understanding was consistent with the other evidence as described above.
Against this very different factual background, New Zealand’s Taxation Review Authority concluded that the owner and operator of the establishment supplied the venue from which others made a separate supply of a sexual service.
In relation to the Failure to Withhold Penalty Assessments, each party accepted that, for a PAYG withholding obligation to arise, it was unnecessary that the sex workers be employees of the applicant. That relationship can give rise to a withholding obligation (s 12-35 within Part 2-5 of Sch 1 to the TAA), as can a payment under a labour hire arrangement (s 12-60). But it was sufficient to engage a withholding obligation if s 12-190 were applicable.
Materially, s 12-190(1) provides:
12-190 Recipient does not quote ABN
(1)An entity (the payer) must withhold an amount from a payment it makes to another entity if:
(a)the payment is for a * supply that the other entity has made, or proposes to make, to the payer in the course or furtherance of an * enterprise * carried on in Australia by the other entity; and
(b) none of the exceptions in this section applies.
Assuming in the applicant’s favour that the sex workers were not its employees, those sex workers nonetheless supplied a service to the applicant so that it, in turn, could fulfil its obligation to its client. On that same assumption, each sex worker did so in the course of carrying on an enterprise in Australia. Each payment made by the applicant to a sex worker was for the supply to it of such a service. That being so, s 12-190(1)(a) was engaged and the applicant was required to withhold an amount from the payment to the sex worker unless one or more of the exceptions in s 12-190 was applicable.

None of these exceptions has been shown to have been applicable. The job sheets are eloquent in this regard. These show that the applicant’s practice was never one of making a PAYG withholding from an amount payable by it to a sex worker. It did not even have an invariable practice of requiring a sex worker to sign for an amount received from it, let alone one of seeking an Australian Business Number (ABN). There is no evidence either on the job sheets or otherwise that sex workers quoted their ABN to the applicant, much less that any had one. On the evidence, no sex worker gave the applicant an invoice relating to a supply to it by that sex worker, much less an invoice quoting that sex worker’s ABN. There was no suggestion that any other exemption might be applicable.
Where s 12-190 of Sch 1 to the TAA was applicable, the effect of reg 38(2) of the Taxation Administration Regulations 1976 (Cth) (in force during the Relevant Period, since repealed) was that the amount that was required to be withheld was, “an amount equal to the product of the top rate and the amount of the payment”. The term, “top rate” was defined in reg 2 of those regulations:
top rate means the sum of:
(a)the highest rate specified in the table in Part I of Schedule 7 to the Income Tax Rates Act 1986; and
(b)the rate of levy specified in subsection 6(1) of the Medicare Levy Act 1986.
Note: This definition is modified by regulation 2A in the temporary budget repair levy years.
The applicant did not withhold the “top rate” from payments to sex workers or any other rate. Inferentially, it just operated on the basis that the PAYG system could have no application to it because of its internal “split” with sex workers and a belief, manifested by a statement on its Ladies Area notice board that each was running her own business. It was well beyond careless and into the realm of gross indifference not at least to require an ABN or invoice from sex workers before just paying them the whole of an agreed “split” (with adjustments only for any tips, “extras” and agreed deductions). It was reckless in the sense discussed in the cases referred to below. The applicant was never disabused by its accountant of its cavalier approach to the PAYG system, even though that approach was obvious on the face of its job sheets. Though we have considered the subject afresh, we do not consider that the circumstances revealed in relation to PAYG non-compliance warrant any remission. It has failed to prove that the Failure to Withhold Penalty Assessments were excessive. Its failure to withhold amounts as required by Div 12 of Sch 1 to the TAA means that it is liable under s 16-30 for administrative penalties as assessed in those assessments.
This then leaves the question as to whether the applicant has proved that the Shortfall Penalty Assessments are excessive.
On the basis of the conclusions which we have reached in relation to what, for GST purposes, the applicant supplied during the Relevant Period, it necessarily follows that, for the purposes of s 284-75 of Sch 1 to the TAA, each BAS contained a false or misleading statement to the Commissioner as to the amount in respect of supplies which it had made. The result in each instance was a tax shortfall.
The Shortfall Penalty Assessments have been made on the basis that the applicant and its tax agent acted recklessly. It does not at all follow from our conclusion about recklessness in relation to PAYG compliance that a like conclusion follows in relation to these separate assessments. Indeed, we have found the question as to whether these assessments were excessive (at least because there was no recklessness) much more difficult to resolve than in relation to the Failure to Withhold Penalty Assessments.
Recklessness is more than gross carelessness: BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347 at 364. Though the test for recklessness is an objective one, it has subjective elements. The latter comprises knowledge that there is a real, as opposed to a fanciful risk that the statement concerned may be incorrect or gross indifference with respect to its consequences: Howard v Commissioner of Taxation (2012) 206 FCR 329, at [56].
In contrast and as Middleton J observed in Commissioner of Taxation v Traviati (2012) 205 FCR 136 (Traviati), at [36], “Reasonable care suggests an objective test, but the particular (and subjective) circumstances relevant to the taxpayer are to be considered in applying the test. So the taxpayer must exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer.” Unlike other observations made in that case in relation to the penalty and remission regime, that observation was not disapproved in the Full Court in the latter case, Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483 (Sanctuary Lakes). Further, and as Middleton J also observed in Traviati, at [36], “reasonable care” and “reasonably arguable” suggest that two different – and independent – standards”.
There is nothing in the conduct of either the applicant or its tax agent (and Mr Derrick, a partner in the firm which acted as the applicant’s accountant and tax agent, in particular) which, in our view, evinces an intentional disregard of the applicant’s GST position. We accept unreservedly that the applicant did turn its mind to who made the supply of the sexual service to the client. That occurred initially during Ms Holland’s tenure as manager of the establishment. And so did its tax agent, via, Mr Derrick. Ms Hayes inherited an arrangement for the payment of sex workers which was in place when she assumed managerial responsibilities. The statement on the notice board in the Ladies Area as to sex workers conducting their own business did reflect a view held by the applicant not just in relation to PAYG but also GST responsibilities and its aspirational business model. So, too, did the elaborate internal accounting via the job sheets of the “split” as between “House” and “Girl” with the House amount being regarded as referable to room hire and the amount payable to the “Girl” being regarded as referable to the provision of the sexual service. In this conception, neither Ms Hayes nor Mr Derrick was dishonest, only mistaken about an incongruity between the applicant’s aspirational business model and the way in which it made representations to, and dealt with, clients in relation to the supply of services being delivered and that differing taxation consequences could occur as a result of that incongruity. Even though one can be reckless without being dishonest, there is no necessary symmetry between being mistaken and being reckless.
Whenever a business activity statement includes an understatement of the amount of taxable supplies for a tax period a consequence will be that there is a shortfall in the amount of GST that is payable. The observations made by Hill and Hely JJ in Hart v Commissioner of Taxation (2003) 131 FCR 203 at [44] (Hart) in relation to the position in relation to a tax return which includes deductions which are not allowable is applicable by analogy. So we accept the first premise of the applicant’s submission that the mere fact of a shortfall is not, in itself, sufficient to make the applicant liable to any penalty. Hart, at [44] is also pertinent for the observation, which remains applicable in relation to the present provision in s 284-90 of Sch 1 to the TAA for the working out of the base penalty amount, that, “the context makes it clear that recklessness means something more than failure to exercise reasonable care … , but less than intentional disregard of the Act”.
The further premises of the applicant’s endeavour to prove the Shortfall Penalty Assessments excessive were principally grounded in the evidence (affidavit and oral) of Mr Derrick.
Mr Derrick was (and is) a qualified accountant. He deposed to having been briefed by Ms Holland about the split fee arrangement with sex workers adopted by the applicant. He had access to and examined the applicant’s accounting records, including the job sheets and cashier sheets. He noted that these reflected the split fee arrangement, as described by Ms Holland, from the moment that the applicant received payment from a client. This led him to conclude that the amounts paid to sex workers under the split fee arrangement were not income of the applicant or in respect of supplies by it but rather income of the sex workers in respect of supplies which they had made. He saw no reason to change this view over the Relevant Period.
Mr Derrick drew comfort in his conclusion from the Commissioner’s Private Binding Ruling Authorisation Number 72326 (PBR). He became aware of this PBR shortly after commencing to provide accounting and taxation services to the applicant. That PBR concerned an arrangement in the sex industry whereby a company intending to operate in the sex industry sought and obtained a ruling on the basis that it would provide to sex workers for a fee a room and related logistic support and administrative services (laundry, linen, secretarial services and the like) and collect payments on behalf of that sex worker as principal from that sex worker’s clients in respect of prices fixed by the sex worker. He considered that the applicant’s position was analogous to that the subject of the ruling.
In cross-examination, it became apparent that Mr Derrick had no idea whether the detailed operation of The Cytherean was at one with the PBR. That is quite apart from his acknowledgment that it was contrary to general accounting practice, if one was receiving amounts to hold on behalf of particular persons (sex workers) not to maintain separate ledgers in respect of each such person and that he agreed that the applicant’s job sheets were imperfect as trust account ledgers. In the present context, to expect the latter would be just to counsel perfection in accounting practice but the former revealed an ignorance which was a serious lapse, given the importance which the PBR had assumed for Mr Derrick in his dealing with the applicant in relation to its taxation affairs.
Mr Derrick was unaware, because he had not sought to ascertain, whether or not it was the applicant or the sex worker which fixed the price for the service which he understood the sex worker provided. He had never seen any price list at all, let alone one which the applicant displayed in its waiting rooms and bedrooms. Neither had Mr Derrick studied the applicant’s website. That was so even though he acknowledged that how the applicant represented itself to the world at large “may have been” of assistance in determining who supplied what for GST purposes. It also emerged in the course of Mr Derrick’s oral evidence that, though he had visited the applicant’s premises, he had not studied the “House Rules” in the Ladies Area but rather proceeded to the manager’s office.
Mr Derrick also acknowledged that he was aware that sex workers did not give an ABN to the applicant or provide it with a Tax File Number. Objectively, absence of the latter might well not raise an interrogative note about whether a sex worker was making a supply to a client in her own right as part of an enterprise she conducted but absence of an ABN was always different and ought for him with his training to have raised an interrogative note.
The wisdom of hindsight, of course, is not the touchstone upon which to measure whether any taxpayer or a tax agent has been reckless or even failed to take reasonable care. But even in prospect and certainly once Mr Derrick became aware of the PBR there were certain basic facts which needed to be established before one might, without at least a failure to take reasonable care, conclude that it was the sex worker, not the applicant, who provided the sexual service to a client. First and foremost, the question which needed to be asked, having regard to the PBR, but never was, was who fixes the price for what the client pays? Related to that was, what, if anything, is the client told about for what he is paying or is the payment just responsive to the price list?
Such questions were never going to be answered by looking at accounting records which showed an internal breakdown after a receipt in gross. That the applicant was receiving sums in gross was, or ought to have been, obvious to Mr Derrick. That, in itself, ought to have provoked the question as to for what the client was paying? No answer to this was to be found in some written contract with the client or even in a tax invoice(s) given to the client for room hire and sexual service respectively for no such invoices were ever given. All of this underscored a need to have some evidence as to what was represented to clients and by whom as to for what they were paying. Mr Derrick’s inquiries looked only from the cashier’s office inwards when, necessarily, they also had to look to for what the client paid as he handed over cash or credit card at that office.
Mr Derrick’s answer that he did not look at the applicant’s website because that would not have been approved of by the firm was not, with respect, credible at all, much less persuasive. We were left to wonder whether this answer had recently been invented. Be that as it may, viewing the applicant’s website could hardly have been regarded as gratuitous, much less prurient, given the professional service he was rendering to the applicant.
What occurred here was an acceptance of a managerial explanation. That acceptance was not entirely uncritical but viewing the applicant’s job sheets and cashier’s ledgers was never going to provide adequate corroborative evidence in respect of that explanation, because none of them was ever seen, much less approved by a client. Such inquiries as Mr Derrick conducted were never going to provide a factual foundation upon which reliably to draw an analogy with the PBR or, more generally, upon which to conclude that two supplies were being made, one by the applicant and one by the sex worker. That is not to say that Mr Derrick was aware of a risk that the supply of the sexual service might not be by the sex worker in her own right and nonetheless continued to provide taxation services including preparing BAS statements, heedless of that risk. Further, upon reflection, the very fact that he took the trouble to undertake research, as a result find and then consider the PBR is not consistent with gross indifference on his part as to which entity was making which supply. Objectively, the circumstances which we have related point to a failure on his part to take reasonable care, not to gross indifference in relation to the GST position.
The applicant did not provide Mr Derrick with any information about its price lists or with details of what it represented on its website. To have drawn his attention to the website would have been to draw his attention to a “fully inclusive” pricing representation to the world at large. Necessarily, that would at least have sounded an inquisitorial note about whether internal accounting reflected external reality in terms of what was supplied and by whom. Mr Derrick’s “may have been” response was indicative to us that, even though he was insufficiently inquisitive, he had the requisite knowledge and experience to appreciate the issue if he had been aware of it. And the same might be said if the applicant have chosen to show Mr Derrick its prevailing price list. It was these documents which told the client for what he would be paying. Objectively, they were always basal in relation to who was making what supply to a client.
In our view, for the applicant to have adhered to a position and adopted and lodged BAS during the Relevant Period on the basis that two separate supplies were being made in the face of its prevailing price list and its “fully inclusive” website representation was a failure to take reasonable care.
The applicant made reference to the detailed nature of the records it maintained. But these were based on a false premise the very nature of which it had formulated in its grossed up price list, in its “fully inclusive” representation on its website and in the guidance given to its reception and cashier staff in its training manual as to what the clients did not need to know. Ms Hayes was not grossly indifferent to the requirements of the GST Act with respect to the operation of The Cytherean but, objectively, she and thus the applicant did not take reasonable case to comply with those requirements.
In his Shortfall Penalty Assessments, the Commissioner increased the base penalty amount by 20% in respect of quarterly tax periods following the initial quarterly tax period during the Relevant Period. This was authorised by s 284-220(1)(c) of Sch 1 to the TAA because, in those later periods, the applicant was “previously liable to a penalty”: Picton Finance Limited v Commissioner of Taxation [2013] AATA 116, at [107]. Thus, it is not relevant as to whether the applicant took steps to prevent the shortfall coming to the Commissioner’s notice, because the 20% uplift was not imposed on the basis that s 284-220(1)(a) was applicable.
For these reasons, we are satisfied that the applicant has proved that the Shortfall Penalty Assessments were excessive but only to the extent of proving that the base penalty amount should be worked out on the basis of a failure to take reasonable care, not on the basis of recklessness.
Though the base penalty amount must be reduced, we are not persuaded that the resultant Shortfall Penalty should, in the circumstances which we have related above, be remitted pursuant to s 298-20 in Sch 1 to the TAA. We accept, as we must in light of Sanctuary Lakes that the Shortfall Penalty regime does not preclude us, in deciding whether or not to exercise the discretion to remit under s 298-20 from taking into consideration a finding that the taxpayer’s position was reasonably arguable in circumstances where a penalty has been imposed for failing to take reasonable care. But, though the applicant’s case before us was argued with consummate skill by its counsel (as was the Commissioner’s), we are not persuaded, in the face of its Price List, where that was displayed, its website and its training manual that the GST position it adopted was reasonably arguable. That, of course, is not exhaustive of the circumstances which might warrant remission. But operation of The Cytherean was a major operation generating a significant cash flow and conducted for profit. Further, what might be the GST consequences as between single supply or two separate supplies was not a novel or even particularly difficult subject but it did entail, potentially, at least a large variation in the net amount which ought to be remitted to the Commissioner. There are no elements of hardship arising from extraneous economic events beyond the applicant’s control which intrude. All in all, we do not consider that the case is one for remission but rather that the reduced Shortfall Penalty is, in the circumstances, aptly left in place.
It necessarily follows that, save to the extent mentioned, the objection decision must be confirmed.

I certify that the preceding 133 (one hundred thirty-three) paragraphs are a true copy of the reasons for the decision herein of The Honourable Justice J A Logan RFD, Deputy President and Deputy President B J McCabe.

Associate: …………[sgd]……………………………..
Dated: 31 October 2018

Dates of hearing: 25-28 September 2017

Counsel for the Applicant: Mr N Williams SC with Ms M Ellicott

Solicitors for the Applicant Balazs Lazanas & Welch LLP

Counsel for the Respondent: Mr S Steward QC with Mr C Sievers

Solicitors for the Respondent:
Australian Government Solicitor

Table 1.
Period	Total number of Job Sheets	Total number of transactions recorded on Job Sheets1	T-Doc reference to Job Sheet where price charged differed from The Cytherean Price List	Description of treatment that is different to The Cytherean Price List	Number of transactions recorded as Escorts (ESC)	Description of treatment that is different to The Cytherean Escort price ($600/hr)	Number of transactions where "M.O.P." recorded as "credit"2
1 October 2013 -31 October 2013	148	2,995	(Ref: T20-927)	C1 (Girl) - Total of $247 where The Cytherean Price List states $250	27	(Ref: T20-991) S2 (Girl) $550 charged for 2nd hour extension instead of $600	0
(Ref:T20 - 1057)	P1 (Girl) - Total of $245 where The Cytherean Price List states $250
1 January 2014 -31 January 2014	120	2,183	(Ref: T45-3314)	M1 (Girl) - Total of $190 where The Cytherean Price List states $250	8	0	13
(Ref: T45-3322)	J1 (Girl) & L1 (Girl) - charge for description '2nd client' for 1 hour of $200 where The Cytherean Price List states $400
1 April 2014- 30 April 2014	141	2,684	0	-	8	0	25

1 Transactions do not include 'extensions' to a booking, 'tips' or 'extras'.
2 For these transactions there is no entry in the "House" column and the only entry is in the "Girl" column.
3.Out of an abundance of caution, even though sex workers (“Girls”) routinely used working names, we have adopted an alpha-numeric designator instead of the name of the “Girl” shown in a particular job sheet entry

Table 1.

Period Total number of Job Sheets Total number of transactions recorded on Job Sheets1 T-Doc reference to Job Sheet where price charged differed from The Cytherean Price List Description of treatment that is different to The Cytherean Price List Number of transactions recorded as Escorts (ESC) Description of treatment that is different to The Cytherean Escort price ($600/hr) Number of transactions where "M.O.P." recorded as "credit" 2

1 August 2014 -

31 August 2014
130 2,851 (Ref: T28-1872) C2 (Girl) - Total of $390 where The Cytherean Price List states $400 27
(Ref: T28-1830)

C2 (Girl)- Total of $1,000 for 2 hours where the Escort price is $1,200
0

1 November 2014 – 30 November 2014

150

2,972

0

-

20

0

0

1 March 2015 -

31 March 2015

149

2,954

(Ref: T46-4590)

B1 (Girl) - Total of $270 where The Cytherean Price List states $400.

2

2

0

(Ref: T46-4608) (Ref: T46-4609) (Ref: T46-4610)

V1, S1 and K1 (Girls) - Description lists 'Bucks' - Total of $300 where The Cytherean Price List states $400

(Ref: T46-4552)

C3 (Girl) - Notation '*client complained' Total of $125 for duration of 15 minutes

(Ref: T46-4562)

L1 (Girl) - Notation '*client complained' - Total of $200 where The Cytherean Price List stated $400

Dates of hearing:	25-28 September 2017
Counsel for the Applicant:	Mr N Williams SC with Ms M Ellicott
Solicitors for the Applicant	Balazs Lazanas & Welch LLP
Counsel for the Respondent:	Mr S Steward QC with Mr C Sievers
Solicitors for the Respondent:	Australian Government Solicitor