Hourigan and Commissioner of Taxation (Taxation)
[2019] AATA 558
•27 March 2019
Hourigan and Commissioner of Taxation (Taxation) [2019] AATA 558 (27 March 2019)
Division:TAXATION & COMMERCIAL DIVISION
File Numbers: 2016/6335 2016/6339
Re:Joshua Hourigan
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President R I Hanger QC
Date:27 March 2019
Place:Brisbane
The decision under review with respect to the imposition of administrative penalties and shortfall interest charges is varied, and:
(a)A base penalty of 50% applies to the 2011, 2013 and 2014 income tax years respectively; and
(b)The relevant shortfall interest charge applies to the 2010 and 2011 income tax years.
............................[SGD].........................................
Deputy President R I Hanger QC
Catchwords
TAXATION – tax liability – shortfall amount – imposition of administrative penalties – imposition of shortfall interest charges greater than 20% – whether there was intentional disregard by the taxpayer – whether the taxpayer was reckless – where no grounds for remission of administrative penalties exist – where no grounds for remission of shortfall interest charges exist – decision under review is varied
Legislation
Administrative Appeals Tribunal Act 1975 (Cth)
Taxation Administration Act 1953 (Cth)
Cases
Bai v Commissioner of Taxation (2015) 67 AAR 197; [2015] FCA 973
BRK (Bris) Pty Ltd v Commission of Taxation (2001) 46 ATR 347; [2001] FCA 164
Commissioner of Taxation v R&D Holdings Pty Ltd (2007) 160 FCR 248; [2007] FCAFC 107
Commissioner of Taxation v White (No 2) (2010) 117 ALD 335; [2010] FCA 942
Hart v Commissioner of Taxation (2003) 131 FCR 203; [2003] FCAFC 105
Hourigan and Commissioner of Taxation (Taxation) [2018] AATA 3369
Secondary Materials
Miscellaneous Taxation Ruling 2008/1
Practice Statement Law Administration PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods
Practice Statement Law Administration PS LA 2012/5 Administration of the false or misleading statement penalty – where there is a shortfall amount
REASONS FOR DECISION
Deputy President R I Hanger QC
27 March 2019
INTRODUCTION
On 10 September 2018, the Tribunal handed down a decision in regards to the Respondent’s audit of the Applicant’s taxation affairs.[1] By way of background, the Applicant sought a review of the Respondent’s decision to issue amended income tax assessments for the income years ending 30 June 2010, 2011, 2012, 2013, and 2014 (‘the subject years’). The Respondent found the Applicant had undeclared income for the subject years and determined the Applicant was liable for both administrative penalties (‘penalties’) and shortfall interest charges (‘SIC’) being applied to all five (5) years. The Applicant objected to the amended assessments to the extent that the objections where disallowed in respect of each year pursuant to subsection 14ZZ(1)(a)(i) of the Taxation Administration Act 1953 (Cth) (‘TAA’).
[1] Hourigan and Commissioner of Taxation (Taxation) [2018] AATA 3369.
The Tribunal’s original decision under review was:[2]
(a)To the extent that it deals with the taxpayer’s primary tax liability for the subject years, set aside and remitted to the Respondent in accordance with these reasons; and
(b)To the extent that it deals with the imposition of penalties and shortfall interest charges, I will allow the Applicant and Respondent to reconsider and make further submissions within 14 days of the date of this decision regarding their respective positions.
[2] Hourigan and Commissioner of Taxation (Taxation) [2018] AATA 3369, at [108].
This decision now deals with the imposition of any penalties and SIC. As part of the original application with respect to these specific issues, the Respondent determined:[3]
(a)that the base penalty rate applied to the Applicant’s tax shortfall for 2010, 2011, 2012, 2013 and 2014 income tax years was 75%, on the basis the Applicant’s behaviour was “intentional disregard”;
(b)a tax shortfall amount applied to the subject years, and therefore the relevant SIC calculation was applied to each of the years;
(c)the tax shortfall amount for the years ended 30 June 2010 and 2011, resulted in the Applicant being liable to pay SIC greater than 20% on the additional amount of income tax that he therefore owed; and
(d)there were no circumstances under PS LA 2006/8 [Practice Statement Law Administration: PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods (‘PS LA 2006/8’)] that applied to the Applicant’s circumstances and it was therefore considered “that remission of SIC for the income years ended 30 June 2010 and 2011 is not appropriate”.
LEGISLATIVE FRAMEWORK
[3] Exhibit 1, T Documents, T2, Reasons for decision dated 28 September 2016, at [92], [190]-[193]; T13, Review of Income Tax Years Ended 30 June 2010 to 30 June 2014 pages 222 – 428.
Administrative penalties
Schedule 1, subdivision 284-B of the TAA sets out the provisions relating to penalties for statements made in accordance with a taxpayer’s taxation affairs. A statement is anything disclosed for a purpose connected with a taxation law,[4] and includes, but is not limited to, information contained in a declaration, notice, or return. A taxpayer may be liable for a penalty if a statement made to the Commissioner of Taxation (‘Commissioner’) is false or misleading in a material particular because of things in it or omitted from it.[5] Whether a statement is false or misleading in a material particular is a question of fact. A “material particular” is something that is likely to affect a decision regarding the calculation of the taxpayer’s tax liability or whether they are entitled to a credit or payment.
[4] TAA Sch 1 s 284-20.
[5] TAA Sch 1 s 284-75(1).
The Commissioner will determine the base penalty amount (‘BPA’). Where the Commissioner finds an “intentional disregard” in making the false statement, the BPA is 75% of shortfall. Where the Commissioner finds a false or misleading statement was “reckless” then the BPA is 50% of the shortfall and “lack of reasonable care” will attract a BPA of 25% of the shortfall.[6]
[6] TAA Sch 1 s 284-90; Miscellaneous Taxation Ruling 2008/1.
Once the BPA is determined, the Commissioner has discretion to increase or decrease the penalty based on the taxpayer’s behaviour. An increase in BPA by 20% is considered under Sch 1 s 284-220(1)(c) of the TAA. An increase in the BPA will apply if there is an “aggravating” feature of the taxpayer’s circumstances.[7] The Commissioner originally determined the taxpayer was aware of the shortfall amount and increased the penalty of 20% for the income tax years ending 30 June 2011, 2012, 2013 and 2014.[8]
[7] TAA Sch 1 s 284-220.
[8] Exhibit 1, T Documents, T2, Reasons for decision dated 28 September 2016, at [102].
A remission of a penalty, in part or in full, is considered under Sch 1 s 298-20 of the TAA. This is an unfettered discretion on the part of the Commissioner and is considered against the Practice Statement Law Administration PSLA 2012/5 Administration of the false or misleading statement penalty – where there is a shortfall amount (‘PSLA 2012/5’).
The PSLA 2012/5 provides guiding general principles that should be taken into account in the application of a penalty. Those principles are:
·The primary purpose of the penalty provision is to encourage entities to take reasonable care to comply with their tax obligations. Generally, an entity will not be penalised where they have made a reasonable and genuine attempt to comply…
·The penalty provision aims to achieve a level playing field, ensuring fairness and equity for all entities and for there to be consequences for failing to take reasonable care, or not making a reasonable effort to comply with correct reporting obligations.
·The compliance model requires us to be fair to entities wanting to do the right thing, but firm with those who are choosing to avoid their tax obligations.
·The Taxpayers' Charter requires us to treat an entity as being honest. We accept that what they have told us is the truth and the information they have provided is complete and accurate unless we have reason to think otherwise.
·We must consider the individual circumstances of each case, including the background and experience of the entity.
·Decisions must be supported by the available facts and evidence. Conclusions about an entity's behaviour should only be made where they are supported by, or can be reasonably inferred from, the facts.
·The entity should be contacted and given the opportunity to explain their actions before a penalty decision is made. Exceptions to this general principle might include fully automated data matching cases or where the facts of the case clearly show deliberate disengagement from the taxation system.
Shortfall Interest Charges
Where the Commissioner has served an amended assessment on the taxpayer, increasing the taxpayer’s liability for income tax, the taxpayer is liable for SIC.[9] Further, where an assessment is amended, the taxpayer is liable to pay the SIC for the period beginning on the day income tax was due under an initial assessment until the day before notice is given of the amended assessment.[10] The liability to pay SIC exists whether or not a penalty is applicable in relation to the amended assessment.[11] The Commissioner must give the taxpayer notice of the amount of the SIC payable.[12]
[9] TAA Sch 1 ss 280-100, 280-102, 280-102A, 280-103, 280-105.
[10] TAA Sch 1 s 280-100(2).
[11] TAA Sch 1 s 280-103(1).
[12] TAA Sch 1 s 280-110.
The rate of the SIC is calculated on a daily compounding basis, the formula being:[13]
[13] TAA Sch 1 s 280-105(2).
Base interest rate for the day
+
3 percentage points
Number of days in the calendar year
The Commissioner has the discretion whether to remit in whole or in part any SIC.[14] The Commissioner may remit all or part of the SIC where the Commissioner “considers it fair and reasonable to do so, taking into account the individual circumstances of a case and the extent to which factors beyond the taxpayer’s control were responsible for the size and duration of the shortfall.”[15]
[14] TAA Sch 1 s 280-160(1).
[15] PS LA 2006/8, part 5.
If the Commissioner declines to remit the SIC, the Commissioner must give reasons. Further, the taxpayer can object to the decision to charge SIC where the unremitted portion is more than 20% of the additional amount.[16] An objection to this decision is within the jurisdiction of the Tribunal.[17]
[16] TAA Sch 1 s 280-160, 280-168, 280-170.
[17] Administrative Appeals Tribunal Act 1975 (Cth) s 17A(f).
RESPONDENT’S CONTENTIONS IN REGARDS TO THE PENATLY AND SIC
The Respondent contends there was a high degree of carelessness by the Applicant in his instructions to his tax agent and the findings for the 2011, 2013 and 2014 income tax years are to be assessed against the following background:[18]
(a)“… in each income year the Applicant’s returns were prepared by a tax agent relying on the information provided by the Applicant;
(b)… it is clear that in each year that information was false and misleading;
(c)… the Applicant could have had regard to this information provided to the tax agent as a starting point and established his actual taxable income. The course of the Tribunal proceedings did not show any attempt by the Applicant to do this. That failure deprived the Tribunal of information it needed to assess what sums had been included in the original taxable income as returned and what was in need of explanation. That he could not do so is evidence of an approach to the provision of information to the tax agent in a manner which was careless, and at times reckless as to its veracity; and
(d)… his conduct of the matter resulted in findings in each year that there were unexplained amounts for which he therefore could not discharge the onus of proof is further evidence of the failure to provide proper information to the tax agent.”
[18] Submissions of the Respondent as to the Penalties and Short Fall Interest Charges, datedWith respect to ‘carelessness’, the Respondent contends there was a high degree of carelessness in the Applicant’s instructions to his tax agent, it being accepted that:
“Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement maker would see there was a real risk that the act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.”[19]
[19] BRK (Bris) Pty Ltd v Commission of Taxation (2001) 46 ATR 347 at [77]; [2001] FCA 164; Hart v Commissioner of Taxation (2003) 131 FCR 203; [2003] FCAFC 105; Commissioner of Taxation v R&D Holdings Pty Ltd (2007) 160 FCR 248; [2007] FCAFC 107.
The Respondent has determined to remit the penalties for the 2010 and 2012 income tax years in full.[20]
[20] Submissions of the Respondent as to the Penalties and Short Fall Interest Charges, dated 30 November 2018, at [13], [18].
In respect of the 2011, 2013 and 2014 income tax years and the base penalty amounts in respect of the primary shortfall amounts, the Respondent submits the penalty should be remitted to 50% for recklessness for each of these years respectively and the Applicant is liable to pay SIC.[21]
[21] Submissions of the Respondent as to the Penalties and Short Fall Interest Charges, dated 30 November 2018, at [22].
APPLICANT’S CONTENTIONS IN REGARDS TO THE PENALTY AND SIC
The Applicant submits that:[22]
[22] Submissions of the Applicant as to Penalties and Short Fall Interest Charges, dated 21 January 2019.
(a)In respect of the 2011 year:
(i)“…includes payments from the Applicant’s father or his companies of $75,000 and $135,000…”;
(ii)“…there should be no base penalty at all applied to the 2011 Loans, because the actions of the Applicant do not come within the first or second test in Section 284-90 of Schedule 1 of TAA.”; and
(iii)“…there was no recklessness as the Taxpayer made the conscious decision not to include the 2011 Loans as income due to the fact that he thought they were loans.”
(b)The base penalty charges for the 2011, 2013 and 2014 income tax years “should at the highest be 25% for a failure to take reasonable care to keep proper records”, and that the Applicant was not reckless in his conduct with respect to taking reasonable care to keep proper business records, including tax invoices and receipts.
(c)In the event the tribunal finds that a base penalty should be applied to the 2011 loans, this should be remitted under sections 298-20 of Schedule 1 of the TAA “on the grounds that there is an unjust outcome resulting from the mechanical process of the law (Law Administration Practice Statement PSLA 2012/5 from paragraph 155 onwards).”
(d)In regards to the relevant SIC: “… the failure of the Applicant to prove the making of the 2011 Loans are based primarily on the actions of the Applicant’s father as to his failure to properly record the payments, or recording them inconsistently. Whilst the Applicant might be in control of the records he kept, those that his father failed to keep or kept inconsistently are “beyond his control” and were the ones the Tribunal relied upon to reach its negative conclusion.”
(e)“The [A]pplicant submits that the interest on the 2011 loans should be remitted as it is fair and reasonable to do so.”
It is noted the Applicant continues to contend the payments in 2011 were loans, when I have previously found the Applicant failed to prove these were in fact loans and determined that it was assessable income.[23]
[23] Hourigan and Commissioner of Taxation (Taxation) [2018] AATA 3369, at [48] and [58].
ISSUE FOR DETERMINATION
The issues now to be determined are:
(a)The appropriate penalty for the 2011, 2013 and 2014 income tax years; and
(b)Whether the shortfall interest charge (‘SIC’) applies for the 2010 and 2011 income tax years.
The evidence before the Tribunal is outlined in the original decision to this matter.[24] Further, and as discussed in the original decision, the Applicant bears the civil onus of proof, and needed to show that on the balance of probabilities, there was no fraud or evasion.[25]
[24] Hourigan and Commissioner of Taxation (Taxation) [2018] AATA 3369.
[25] Bai v Commissioner of Taxation (2015) 67 AAR 197, at [25]; [2015] FCA 973.
This onus continues to rest with the Applicant and he bears the burden of proving that the imposition of a penalty is excessive.[26] On the submissions before me, I am not satisfied the Applicant has discharged that burden with respect to the appropriate penalty for the 2011, 2013 and 2014 income tax years.
[26] Commissioner of Taxation v White (No 2) (2010) 117 ALD 335 at [18]-[19]; [2010] FCA 942.
What is the appropriate penalty for the 2011, 2013 and 2014 income tax years?
In consideration of the further written submissions received in response to imposition of penalties for the 2011, 2013 and 2014 income tax years, I make the following findings:
2011
(a)In relation to this year I did not accept the Applicant’s evidence that the sums of $75,000, $135,000 and $20,000 were loans from the Applicant’s father. I decided that he had not discharged the onus of proof in relation to these matters. Nor was I satisfied with his evidence to the effect that the alleged loans had been repaid. The Applicant asserts that the payments were loans from his father but in relation to the payments totalling $135,000, he knew or should have known that they came from National Cellulose Insulation Pty Ltd Australia (“NCIA”).
(b)In relation to the sale of the machinery the payment also did not come from his father. The Applicant may be a victim of his father’s conduct but that does not alter the fact that the Applicant’s conduct fell significantly short of the standard expected of a reasonable person. His conduct amounted to gross carelessness.
(c)I accept the submission by the Respondent the Applicant was reckless and that the base penalty of 50% should be applied.
2013 and 2014
(a)To the extent that he was able to prove certain things in relation to 2013, I found that his income should be reduced but once again he failed to discharge the onus of proof that was on him to show what his income was.
(b)It is clear the Applicant failed in both 2013 and 2014 to keep proper records or provide proper papers to his tax agent and, that being the case it is highly likely that his taxation returns would be incorrect. His conduct falls significantly short of the standard expected of a reasonable person and he was not helped by a failure to put before the tribunal all relevant evidence.
(c)For both 2013 and 2014, I accept the submission by the Respondent that the Applicant was reckless and the base penalty of 50% should apply.
Whether Shortfall Interest Charges applies for the 2010 and 2011 income tax years?
SIC applies where a taxpayer is liable for an amended tax return. The tribunal may only review a SIC charge where the percentage is greater than 20%.[27]
[27] TAA Sch 1 s 280-160, 280-168, 280-170.
The Respondent calculated, in its initial amended assessment, the SIC to be:[28]
[28] Submissions of the Respondent, dated 21 February 2017.
Year ended
30 June
Income tax liability
(original returns)
$
Income tax liable after objection
$
Additional income tax
$
SIC
$
SIC as a percentage of additional income tax 2010 16,611.15 27,982.35 11,371.20 4,164.45 37% 2011 -1,585.40 105,542.50 107,127.90 25,417.08 24% 2012 671.95 83,174.55 82,502.60 15,009.79 18% 2013 -1,492.00 2,040.35 3,532.35 363.51 10% 2014 -1,008.47 9,110.15 10,118.62 395.31 4%
Following the hearing, the Respondent re-calculated, on the basis of the tribunal’s findings, the SIC to be:[29]
[29] Submissions of the Respondent as to the Penalties and Short Fall Interest Charges, dated 30 November 2018, at Part III. The calculations provided for the penalties have been omitted from this table.
Year ended
30 June
Tax Shortfall (Objection)
$
Tax Shortfall (AAT)
$
SIC
$
2010 11,371.20 2,056.00 760.00 2011 107,127.90 108,768.00 26,440.00 2012 82,502.60 1,226.00 225.00 2013 3,532.35 2,701.00 312.00 2014 10,118.62 10,119.00 285.00
The Respondent did not provide to the Tribunal the calculation of the SIC as a percentage of additional income tax in its final written submissions. On the basis of the new tax shortfall amount, the Tribunal has calculated the SIC as a percentage as:
Year ended
30 June
Tax Shortfall (Objection)
$
Tax Shortfall (AAT)
$
SIC
$
SIC as a percentage of additional income tax
%
2010 11,371.20 2,056.00 760.00 37% 2011 107,127.90 108,768.00 26,440.00 24% 2012 82,502.60 1,226.00 225.00 18% 2013 3,532.35 2,701.00 312.00 12% 2014 10,118.62 10,119.00 285.00 3%
As the SIC for the income tax years ending 30 June 2012, 2013 and 2014 remains at less than 20%, I am satisfied the tribunal continues not to have jurisdiction to consider the SIC for these years. I am only able to consider whether the SIC continues to apply for the income tax years ending 30 June 2010 and 2011 given the SIC is greater than 20% of the additional income tax.
As previously stated, the SIC: [30]
·applies to income tax on an amended assessment for an income year;
·is a discretionary amount determined by the Commissioner;
·can still be charged regardless of whether or not the Commissioner decides to remit a penalty; and
·may only be remitted where it is fair and reasonable to do so.
[30] TAA Sch 1 ss 280-100, 280-103, 280-160; PS LA 2006/8.
In deciding whether to remit a SIC, regard must be given to “the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments”.[31] Again, the onus rests with the Applicant to demonstrate that his individual circumstances of the matter and there were factors beyond his control that were responsible for the size and duration of the shortfall.
[31] TAA Sch 1 s 280-160(2)(b); PS LA 2006/8 part 5A.
Although the assessment for the 30 June 2010 income tax year was adjusted (reduced), I originally found the Applicant had not adequately explained the source or sources for the balances of unexplained deposits and that he failed to prove for the financial year ending 2010 there was no evasion of tax.[32] The Applicant has not provided submissions as to whether it is fair and reasonable to remit the SIC for the 2010 income tax year, nor has he provided evidence that it is fair and reasonable to remit this charge.
[32] Hourigan and Commissioner of Taxation (Taxation) [2018] AATA 3369, at [34]-[35].
I have already found the Applicant’s conduct with respect to his income tax return for the year ended 30 June 2011 amounted to gross carelessness. There is no evidence before me to demonstrate there were factors beyond the Applicant’s control which resulted in the size and duration of the shortfall to warrant a remission of the SIC for 2011.
Accordingly, I find the SIC calculated as per the formulae outlined in [10] applies to the 2010 and 2011 income tax years respectively. The decision as to whether the SIC for the 2012, 2013 and 2014 income tax years rests with the Commissioner.
CONCLUSION
The decision under review with respect to the imposition of penalties and shortfall interest charges is varied, and:
(a)A base penalty of 50% applies to the 2011, 2013 and 2014 income tax years respectively; and
(b)The relevant shortfall interest charge applies to the 2010 and 2011 income tax years.
I certify that the preceding 33 (thirty-three) paragraphs are a true copy of the reasons for the decision herein of Deputy President R I Hanger QC
......................[SGD]......................................
Associate
Dated: 27 March 2019
Date of hearing:
12 February 2018
Date further submissions received:
30 November 2018
21 January 2019
Solicitor for the Applicant:
Mr John Rivett
Counsel for the Respondent:
Mr Simon Grant
Solicitors for the Respondent:
Australian Government Solicitor
30 November 2018, at [9]-[11].
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