Howard and Commissioner of Taxation (Taxation) - [2019] AATA 1910

Howard and Commissioner of Taxation (Taxation) [2019] AATA 1910 (11 July 2019)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2017/5035
Re:Brian Howard
APPLICANT

AndCommissioner of Taxation
RESPONDENT

DECISION
Tribunal:Deputy President I Molloy
Date:11 July 2019
Place:Brisbane

The objection decision dated 26 June 2017 is affirmed.
....................................................................
Deputy President I Molloy
Catchwords
TAX – deemed dividend – whether dividend was a loan or income – whether the dividend applied to the 2009 or the 2010 income tax year – exercise of a discretion – reasonable grounds – whether penalty should be remitted in full or in part – whether shortfall interest charge should be remitted in full or in part – decision under review affirmed.
Legislation
Income Tax Assessment Act1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth)
Cases
Cameron Brae Pty Ltd v Commissioner of Taxation (2007) 161 FCR 468
Re Johnston and Commissioner of Taxation (2011) 81 ATR 908
Rowntree v Federal Commissioner of Taxation (2016) 103 ATR 482
REASONS FOR DECISION
Deputy President I Molloy
11 July 2019
INTRODUCTION

Brian Howard (“the applicant”) applies for review of an objection decision made by the Commissioner of Taxation (“the Commissioner” or “the respondent”) dated 26 June 2017 (“the Objection Decision”) disallowing his objection in relation to an amended assessment issued for the income year ended 30 June 2010 (“the 2010 income year”).
Mr Howard is in the business of bulk cargo handling, storage and stevedoring. Bulk Cargo Services Pty Ltd (“Services”) and Bulk Cargo Storage Pty Ltd (“Storage”) are companies incorporated in Australia and two of Mr Howard’s operating entities. At all relevant times he was the sole ordinary shareholder and director of Services, and the sole shareholder and director of Storage.
The BJ Howard Finance Trust (“the Finance Trust”) was settled by deed of settlement on 25 June 2009 constituting BJ Howard Finance Pty Ltd ACN 137 820 127 as trustee.[1] The Finance Trust at all relevant times held one W Class share in Services.
[1] Exhibit 1, T Documents, T29, pages 307 - 322.
This review concerns a loan made between the Finance Trust, as lender, and Mr Howard, as borrower, which the Commissioner contends is a deemed dividend in the 2010 income year.
The Income Tax Assessment Act1936 (Cth) (“ITAA36”), Division 7A, Subdivision E, allows a private company to be taken to pay a dividend to an entity (the “target entity”) if an entity interposed between the private company and the target entity makes a payment or loan to the target entity under an arrangement involving the private company.
In terms of ITAA36, Division 7A, Subdivision E, the Commissioner contends that the private company is Services; the interposed entity is the Finance Trust; and the target entity is Mr Howard.
The Commissioner, by the amended assessment, applied ITAA36 sections 109T and 109W to deem an amount of $3,454,290 as an unfranked dividend under ITAA36 section 109D, assessable to Mr Howard pursuant to ITAA36 section 44 in the 2010 income year.
Details of the amended assessment, which followed an audit, are as follows:

Pre-audit Taxable Income Adjustment (increase in taxable income) (A) Tax Shortfall Amount / Additional Tax
(B)
Penalties

(C)
Shortfall interest charge
Total Amount Payable = A+B+C

$227,230

$3,454,290

$1,606,244.85

$401,561.20

$347,281.98

$2,355,088.03

ISSUES

There is no dispute that there was a loan from the Finance Trust to Mr Howard. At the hearing the issues were:
(a)whether the loan was made in the 2009 income year or the 2010 income year and the amount of the loan;
(b)whether a decision should made under ITAA36 section 109RB to disregard any dividend determined under section 109D, or alternatively to frank to the maximum amount possible;
(c)whether the discretion to make a determination under ITAA36 section 109W(1) should be exercised, and if so, how;
(d)whether an administrative penalty was correctly imposed pursuant to the Taxation Administration Act 1953 (Cth) (“TAA”) Schedule 1, section 284-75(2),;
(e)whether the discretion should be exercised to remit all or part of the penalty in accordance with TAA, Schedule 1, section 298-20(1);
(f)whether a shortfall interest charge under TAA, Schedule 1, section 280-100(1) was correctly imposed; and
(g)whether the discretion should be exercised to remit all or part of the shortfall interest charge in accordance with TAA, Schedule 1, section 298-160(1).
The Loan
The applicant contends that the loan was made in 2009. The respondent contends the loan was made in 2010.
There is a Loan Agreement in writing, made between the Finance Trust, as lender, and
[2] Exhibit 1, T Documents, T31, pages 342 – 366.
Mr Howard, as borrower, dated 26 May 2010 (“the Loan Agreement”).[2]
The Loan Agreement recites that the lender has agreed to provide a loan to the borrower in the amount of $3,646,138.51, and that the parties have agreed to enter into this Document to set out the terms and conditions of the loan.
The Loan Agreement further recites that the said amount owed by the borrower to the lender, and any other monies that become owing pursuant to this Document or any other Transaction Document, are to be fixed and recorded in the accounts of the lender and the borrower as a loan.
Clause 2(a) of the Loan Agreement provides that: “The Lender, at the request of the Borrower has agreed to provide the Loan to the Borrower on the Commencement Date”. In clause 1.1, the Commencement Date is defined as the date upon which the Advance is made to the borrower by or at the direction of the lender. The Advance is not defined.
By clause 8 of the Loan Agreement, the borrower grants to the lender a second mortgage over property located at 136 Darling Street, Balmain, New South Wales.
Schedule 1, Item B(a), provides that: “The Borrower must repay the Money Owing under this Loan within 25 years of the Commencement Date”. Item C specifies the rate of interest or the method of calculating the rate.
The Commissioner submits that the loan arose out of the Loan Agreement and was made on or about the date of that Document.
The applicant contends that the loan was made, or is deemed by ITAA36 section 109D(4) to have been made, on 30 June 2009, that is, in the 2009 income year, on terms subsequently set out in the Loan Agreement. Section 109D(4) extends the making of a loan to include the matters described in ITAA36 section 109D(3) including any transaction which in substance effects a loan.
Alternatively, the applicant contends that if the loan was made in the 2010 income year, then it was for a lesser sum then the amount referred to in the Loan Agreement.
I do not accept the applicant’s contentions. I am not satisfied that the loan was made other than in the 2010 income year pursuant to and for the amount referred to in the Loan Agreement.
The Loan Agreement, including the recitals, do not record that it is setting out the terms of an already existing loan, or any transaction falling within ITAA36 section 109D(3), as might be expected if that were the case.
Some of the wording could be described as neutral in this regard, but I do not think that an objective reader, unaware of the applicant’s argument, would think to read the Loan Agreement in the way for which the applicant contends.
The applicant’s initial assertion was that no loan was made by the Finance Trust to the applicant in the 2010 income year, and that a loan of $3,646,138 was made in the 2009 income year,[3] it having been made either orally[4] or in the mind of the applicant as at
[3]     Exhibit 6, Witness statement of Stephen Andrew Toohey dated 19 November 2018 (“Toohey”), [22], Appendix14, page 2; Exhibit 3, Witness statement of Brian James Howard, dated 11 December 2017 (“Howard, 2017”), [20], [37], pages 21, 54; Exhibit 2, Supplementary T Documents, ST-1, page 638, [61].
[4]     Exhibit 3, Howard 2017, [26].
[5]     Exhibit 4, Witness statement of Brian James Howard, dated 16 November 2018 (“Howard 2018”), [9].
30 June 2009.[5] As I have said, I am not satisfied on the facts that this was the case.
In the 2009 income year Mr Howard was being advised by his accountants, Toohey Reid, and in particular by a partner in the firm, Stephen Toohey. In that time a number of transactions did take place on Mr Toohey’s advice some of which have already been mentioned.
On 22 June 2009, BJ Howard Finance Pty Ltd was incorporated, with the applicant as its sole director, secretary and shareholder.[6] On 25 June 2009, a deed constituting the Finance Trust was executed.[7]
[6] Exhibit 1, T Documents, T33, pages 420-1.
[7] Exhibit 1, T Documents, T29, page 321.
The trustee of the Finance Trust, as I have said, is BJ Howard Finance Pty Ltd.
[8] Ibid.
Mr Howard is a primary beneficiary of the trust.[8]
On 29 June 2009, Services issued one ‘E’ class share to the Finance Trust.[9] A share certificate was issued to the Finance Trust dated 29 June 2009.[10] The change in shareholding was notified to ASIC on 30 June 2010.[11]
[9]     Exhibit 1, T Documents, T14, page 161 and T15, page 162, respectively.
[10]    Exhibit 1, T Documents, T13, page 160.
[11]    Exhibit 1, T Documents, T16, pages 163 - 164.
The applicant had sought to characterise the purpose of these and other alleged transactions, described as a restructure, as being asset protection or succession planning.[12]
[12] Exhibit 1, T Documents, T6, pages 85 - 86; Exhibit 2, Supplementary T Documents, ST-1, pages 640-1 and 644; ST-18, page 814; ST-19, page 852, [40]; ST-19, page 859, [90]-[92].
Despite this Mr Howard says that the then pending amendments to the taxation law were explained by Mr Toohey, making it critical that the new structure, including the loan to him, be put in place prior to 1 July 2009.[13] Mr Toohey’s statement confirms giving this advice to Mr Howard.[14] This evidence became more important to the applicant’s case as it developed.
[13] Exhibit 4, Howard 2018, [9].
[14] Exhibit 5, Toohey, [11].
Whether or not a loan from the Finance Trust to Mr Howard was made in the 2009 income year largely hinges on Mr Howard’s and Mr Toohey’s evidence of a conversation or conversations said to have taken place between them in June 2009.
Mr Howard’s witness statement went into considerable detail as to what occurred up to and including 30 June 2009. His oral evidence, however, revealed that he had scant independent recollection of many crucial events, and an incomplete understanding of what occurred or was said to have occurred.
Amongst other things, Mr Howard could not recall whether the declaration of a dividend of $4,059,601 by Services in favour of the Finance Trust, important to the restructure, was made on or before 30 June 2009,[15] but instead relied upon Mr Toohey to say that it had occurred.[16]
[15] Transcript, page 34, 30.
[16] Transcript, page 35, 14.
At the same time, Mr Howard appeared to accept that the dividend declaration was signed after 30 June 2009,[17] and that the loan amount was also determined after that date.[18] He could not remember when the proposal for the mortgage referred to in the Loan Agreement first arose.[19]
[17]    Transcript, page 32, 11-15.
[18]    Transcript, page 32, 18-26.
[19]    Transcript, page 30, 42.
Mr Howard said he did not give instructions to Toohey Reid to extinguish a loan to him from Services in the amount of $3,454,290,[20] despite his statement asserting that “I instructed Toohey Reid to extinguish the Services Loan on 30 June 2009…”.[21]
[20] Transcript, page 38, 40.
[21] Exhibit 3, Howard 2017, [28].
Mr Howard could not remember the dates of the asserted meetings with Mr Toohey. Instead, he was told of the dates and he accepted he had meetings on the dates he was told.[22]
[22] Transcript, page 43, 0.
He could not recall the details of the loan between himself and the Finance Trust, said to have occurred on 30 June 2009, including the rate of interest to be charged or the term of the loan.[23] This is despite Mr Howard’s written statement recounting, with some precision, such details.[24] Instead, the evidence was that the applicant was told of the amounts that were said to comprise the loan amount by Toohey Reid and he accepted those amounts.[25]
[23]    Transcript, page 43, 40.
[24]    Exhibit 4, Howard 2018, [9].
[25]    Transcript, page 20, 23-27.
Mr Howard did not offer any explanation for the delay between 30 June 2009, when the loan was said to have occurred, and 26 May 2010, when the Loan Agreement was entered into.[26] This is despite the applicant’s statement that Mr Toohey told him that it was “critical that this structure and this loan to you is agreed and implemented by 30 June 2009…”.[27]
[26] Transcript, page 44, 37.
[27] Exhibit 4, Howard 2018, [9].
In light of these matters, I accept the Commissioner’s submission that little or no weight can be placed on Mr Howard’s evidence as to the existence of any loan between the Finance Trust and himself arising on or before 30 June 2009.
The other witness as to the alleged loan, Mr Toohey, found himself in a difficult position. He had advised on the restructure and was responsible for implementing it. His evidence was there was a 30 June 2009 deadline.
Mr Toohey, or his firm, continued to advise Mr Howard, represented him in his dealings with the Commissioner, and has had the conduct of this proceeding on his behalf.
I thought Mr Toohey’s interest in advancing Mr Howard’s case coloured his evidence. I do not think his evidence was deliberately misleading, but it was hardly objective.
It was submitted on behalf of the Commissioner that Mr Toohey, in his evidence, was at times evasive, selective, or non-responsive. He was accused of speculating or even guessing at answers. He was certainly protective and defensive.
The Commissioner referred to aspects of Mr Toohey’s evidence which were contradictory, to his apparent willingness to speculate on important factual events, and to a propensity to prevaricate while giving oral evidence. There was some justification for each of these observations. As I have said, my impression was that what he said or recalled was influenced by a desire to advance the applicant’s case.
In such circumstances the contemporaneous documentation is often useful in determining what actually happened. As the Commissioner points out, however, there is an absence of contemporary documentation. The only meeting note put forward by Mr Toohey makes no reference to any loan from the Finance Trust to Mr Howard or of the details of such a loan.
It is reasonable to have expected some documentary evidence corroborating the existence and content of the conversation or conversations referred to. Despite the absence of any contemporaneous notes to assist him, Mr Toohey was able to recall with surprising specificity what he told Mr Howard in late June 2009.[28]
[28] Exhibit 6, Toohey, [14].
There was no working paper that determines the amount of the loan said to have been created on or around 30 June 2009. There is no memorandum or resolution by the trustee of the Finance Trust, creating a loan at that time, no written advice supporting the making of such a loan at or prior to 30 June 2009, or any other objective documentary record to support the existence of the loan from the Finance Trust prior to 1 July 2009 or its terms.
There is no direct objective evidence of the payment of the dividend by Services to the Finance Trust, at the time it is said to have occurred, and which was said to be part of the restructure. As the Commissioner points out, the resolution by the director of Services, said to have been created on 30 June 2009,[29] is to pay the dividend, and is not a record of actual payment.
[29] Exhibit 1, T Documents, T17, page 165.
On the state of the evidence by and on behalf of the applicant, I am not satisfied that the payment of a dividend had occurred by 30 June 2009, or even that the declaration of a dividend had occurred by that date.
The applicant’s case was that the loan to him from the Finance Trust occurred by way of set-off.[30] I agree with the Commissioner’s submission that the precise nature of the so-called set-off remains obscure. Mr Howard, at paragraph 29 of his witness statement, says:[31]
“the dividend declared in favour of the Finance Trust was not paid by way of cash payment but was instead satisfied by the Finance Trust becoming a party to a new loan, as a creditor, as between itself and myself as at 30 June 2009”.
[30] Applicant’s Further Amended SFIC, dated 5 March 2019, [32].
[31] Exhibit 3, Howard 2017, page 4, [29]4.
On the other hand, Mr Toohey attaches diagrams to a letter dated 6 June 2018,[32] and as Appendix 14 to his statement, depicting a somewhat different transaction.
[32] Exhibit 9, Correspondence from Toohey Reid to the Deputy Commissioner of Taxation, dated 6 June 2018.
Returning to the date of the loan, the Commissioner rightly questions how a loan for $3,646,138, which was the applicant’s initial contention, could have been made on
30 June 2009, when this amount:
(a)included amounts that were not advanced as at 30 June 2009, being the July tax payments;
(b)included a payment of superannuation, where there is no evidence that the payment was made by 30 June 2009;
(c)included amounts about which there is insufficient evidence that they were advanced at the applicant’s direction, or were assigned to the applicant’s loan owed by the applicant to Services, by 30 June 2009, when such evidence could have been expected to exist; and
(d)included ‘cash dividends’ about which there is insufficient evidence to show that such amounts were loaned to the applicant.
Similarly, the Commissioner submits the financial statements of the Finance Trust, as at 30 June 2009, should not be accepted as evidence to support the applicant’s assertion of a loan of $3,646,138 being advanced to the applicant as at 30 June 2009 as:
(a)the financial statements are unaudited, prepared in the office of Toohey Reid;
(b)the financial statements were prepared after 30 June 2009 and are therefore not contemporaneous;[33] and
(c)the financial records of the Finance Trust record amounts said to be included in the amount of $3,646,138 as at 30 June 2009, as referred to in the previous paragraph.
[33] Exhibit 10, Affidavit of Shelly Elizabeth Connell, sworn 6 April 2018 (“Connell”) [1], [6].
Moreover, and has I have said earlier, there is no contemporaneous document supporting the applicant’s assertion that the terms of any such oral or mentally determined loan were defined with such specificity, on 30 June 2009.
The events after 30 June 2009 are also telling. On or about 3 December 2009, Shelley Connell, then an employed accountant in Toohey Reid, received a dividend statement from Mr Toohey.[34] The dividend statement was said to be in respect of a dividend declared by Services for the amount of $4,059,601 in favour of the Finance Trust.
[34] Ibid [4].
It appears that Ms Connell was preparing Services’ financial statements for the 2009 income year at or around that time. I should say that having seen and heard Ms Connell, I have no hesitation in accepting her evidence.
On or about 3 May 2010, Ms Connell was instructed by Mr Toohey to attend to a loan agreement between the Finance Trust, as lender, and Mr Howard, as borrower.[35] On or about 19 May 2010, McInnes Wilson Lawyers were instructed by Toohey Reid to prepare a loan agreement between the Finance Trust as lender and the applicant as borrower.[36] Based on those instructions the Loan Agreement was prepared.[37]
[35] Ibid [7].
[36] Ibid.
[37] Exhibit 7, Affidavit of Brendan McGrath, sworn 3 April 2018, [2].

A document titled “Brian Howard Group – Structure Review June 2009”, dated 19 May 2010,[38] was created and outlines under the heading the “Recommended Structure”. This is the structure, or restructure, which the applicant asserts was already implemented on 30 June 2009.[39] Under the heading “Action Required” it suggests that “Bank and Investment Entities for Bulk Cargo Group” be established.[40]
[38]    Exhibit 3, Howard, 2017, page 7.
[39]    Ibid page 12.
[40]    Ibid page 14.
I agree with Commissioner’s submission that, in light of the date of this advice, it could have been expected that the loan, if it already existed, would have, at the least, been disclosed, and the security for the loan have been fully considered.
The assets listed in the “Adjusted Personal Balance Sheet”, include the property purchased by the applicant located at Thornleigh, New South Wales,[41] which was purchased in late 2009.
[41] Ibid page 13.
As I have said the applicant’s initial argument was that a loan of $3,646,138, or some such figure, was made in the 2009 income year.
The applicant was permitted to amend his objection after the evidence was completed. This potentially presented a problem for both parties given the stage at which the amendment was allowed. Neither party, however, sought to call further evidence or recall any witness for further cross-examination.
By the amendment, the applicant claimed, in the alternative, that if and to the extent the loan was made in the year ended 30 June 2010, the amount of the loan was an amount the applicant had agreed to pay Services on 30 June 2009, totalling $1,130,668, and did not to include amounts originally said to have formed part of the loan.
It suffices to say I am unable to find, on the evidence, that there was a loan made in the 2010 income year other than pursuant to the Loan Agreement dated 26 May 2010 for $3,646,138.51. I am unable to find on the evidence that the applicant had agreed to pay Services on 30 June 2009, or at any other time, $1,130, 668.
The applicant has not discharged his onus to show why the loan amount, is not as specified by the Loan Agreement, and should be regarded as some lesser amount.
In the end I am not satisfied, having heard and seen Mr Toohey, having regard to the deficiencies in Mr Howard’s evidence, and also having regard to the other matters referred to, that any loan, for any amount, was made between the Finance Trust and Mr Howard in the 2009 income year. I accept the submission that the written Loan Agreement records what had occurred by or about the date of that document and consequently after 30 June 2009.
I also accept the Commissioner’s submissions that, within the extended meaning of a loan, and for the purposes of ITTA36 section 109D(4), the evidence does not satisfy me that there was:
(a)any advance of monies on 30 June 2009 by the Finance Trust to the applicant, within the meaning of ITAA36 section 109D(3)(a).
(b)provision of credit or financial accommodation on 30 June 2009 by the Finance Trust to the applicant, pursuant to ITAA36 section 109D(3)(b), as such financial accommodation occurred on the execution of the Loan Agreement in
May 2010;
(c)payment for or on behalf of the applicant by the Finance Trust on
30 June 2009, pursuant to ITAA36 section 109D(3)(c); or
(d)any transaction which in substance effects a loan pursuant to ITAA36 section 109D(3)(d) as at 30 June 2009 for the amount of $3,646,138 or any other amount. Such obligations arose in the 2010 income year on the execution of the Loan Agreement.
LEGISLATIVE FRAMEWORK
Discretion under ITAA36 section 109RB
The Commissioner relied on ITAA36, Division 7A, section 109T(1)(b), which provides:
(1)This Division operates as if a private company makes a payment or loan to an entity (the target entity) as described in section 109V or 109W if:
(a)    the private company makes a payment or loan to another entity (the first interposed entity) that is interposed between the private company and the target entity; and
(b)    a reasonable person would conclude (having regard to all the circumstances) that the private company made the payment or loan solely or mainly as part of an arrangement involving a payment or loan to the target entity; and
(c)    either:
(i)the first interposed entity makes a payment or loan to the target entity; or
(ii)another entity interposed between the private company and the target entity makes a payment or loan to the target entity.
Here the relevant provision was section 109W. At the hearing the applicant did not press the point, an original ground, that the requirements of ITAA36 section 109T(1)(b) were not satisfied.[42] There were also a number of other grounds which were not pressed.
[42] Transcript, page 206, 45-6; Applicant’s Amended Submission dated 8 April 2019, [1A].
The applicant did not rely on any of the exclusions in ITAA36 section 109D, or on section 109J which provides inter alia that payments discharging pecuniary obligations are not treated as dividends.[43] Furthermore, the applicant did not rely on ITAA36 section 109Y to limit the amount of any dividend which may be found to be payable,[44] or on any transaction constituting a loan within s109N.[45] It was submitted, however, that section 109N was not completely irrelevant, which I will return to.
[43] Transcript, page 206, 14-17; Applicant’s Amended Submission, dated 8 April 2019, [1A].
[44] Transcript, page 209, 39-40; Applicant’s Amended Submission, dated 8 April 2019, [1A].
[45] Transcript, page 209, 40-47.
The applicant submitted that the discretion contained in ITAA36 section 109RB arises and should be exercised in its favour. Section 109RB(1) provides:
Commissioner may disregard operation of Division or allow dividend to be franked
(1) The Commissioner may make a decision under subsection (2) if:
(a) this Division (disregarding this section) operates with the result that:
(i)a private company is taken to pay a particular dividend to a particular entity (the recipient) under this Division; or
(ii)a particular amount is included, as if it were a dividend, in the assessable income of a particular entity (also the recipient) in relation to a private company under Subdivision EA; and
(b) the result mentioned in paragraph (a) arises because of an honest mistake or inadvertent omission by any of the following entities:
(i)the recipient;
(ii)the private company;
(iii)any other entity whose conduct contributed to that result.
Section 109RB, in subsection (2), confers a discretion to disregard the application of ITAA36 Division 7A, or to treat the dividend mentioned in subparagraph (1)(a)(i) as franked in accordance with Part 3-6 of the Income Tax Assessment Act 1997 (Cth).
As the applicant concedes, the occasion for the exercise of the discretion is limited to cases in which the result referred to in paragraph (1)(a) of ITAA36 section 109RB arises “because of an honest mistake or inadvertent omission”.
The inadvertent omission is said to be the failure to ensure compliance with the requirements of ITAA36 section 109N. This section provides that loans meeting certain criteria including minimum interest rate and maximum term are not treated as dividends. More specifically, a loan is not taken to be a dividend under Division 7A if:
(a)the loan agreement is in writing;
(b)the interest payable is not less than a statutory minimum interest rate, known as the “benchmark interest rate”; and
(c)the term of the loan is no longer than the statutory “maximum term”.
The applicant submits that the first two criteria are satisfied. As to the third, the maximum term of a loan is specified in section 109N(3)(a), relevantly in this case, as 25 years if the loan is secured by a registered mortgage over real property as to 100% of its value and the market value of the property at the time the loan is made (less any other loans secured over that property in priority to that loan) is at least 110% of the amount of the loan.
As to this, the applicant submits:
“The Applicant’s accountant prepared the Brian Howard Group structure review June 2009 (exhibit 3, BH1) which indicated that the market value of 136 Darling Street, Balmain was $4,009,000 against a mortgage held by related entity (being Finance) of $3,646,138.51 (exhibit 3, BH1, p 13).
It would appear that National Australia Bank Limited held a mortgage over the above property.[46] Therefore Finance was only able to take a second registered mortgage over the property.[47] The failure to satisfy s 109N(3)(a) was due to inadvertent error by the Applicant or the Applicant’s accountant.
The mistake was an honest one arising out of the urgency to agree and implement the loan agreement by 30 June 2009 that complies with ‘normal Division 7A loan terms…’ (exhibit 6, [18]).[48]”
[46] Exhibit 2, Supplementary T-Documents, ST-4, page 660.
[47] Exhibit 1, T Documents, T31, page 359, cl. 8.
[48] Applicant’s Amended Submissions, dated 8 April 2019, [80] to [82].
I am unable to conclude that the failure to comply with all the requirements of ITAA36 section 109N was due to an honest mistake or inadvertent omission. The applicant was at all material times being advised on the restructure. The urgency to agree to implement the loan by 30 June 2009 hardly comes into it, not least because of my finding that the loan was made in the 2010 income year.
In any event, neither the applicant nor Mr Toohey gave any evidence satisfying me that the omission, if properly so-called, was due to an honest mistake or inadvertence. The evidence is that deliberate steps were taken based on professional advice and an awareness of the statutory provisions.
No explanation was given satisfying me that non-compliance with the requirements of ITAA36 section 109N could be described as an honest mistake or inadvertence.
The applicant, in final submissions,[49] also contended that, in relation to the 2009 income year, an inadvertent omission was not to complete the written agreement prior to the date of lodgement of the return. I think that is answered by my finding that I am not satisfied there was any loan agreement at all in 2009.
[49] Transcript, page 221, 9-11.
To be clear, I am not satisfied that the absence of an agreement, whether oral or written, prior to 1 July 2009, was due to honest mistake or inadvertent omission.
Determination under s 109W
During the hearing, albeit in final submissions, the applicant raised a new issue.[50] The applicant submits that ITAA36 section 109W must be read in the context of section 109X.
[50] Transcript, page 207, 35-42.
Section 109W provides relevantly:
Private company’s loan to target entity through one or more interposed entities
Private company taken to lend if target entity receives loan
(1)If the target entity is lent an amount by the interposed entity, this Division operates as if the private company had made a loan (the notional loan) of the amount (if any) determined by the Commissioner to the target entity when the interposed entity made the loan to the target entity.
Note: Subsection 109D(4) specifies the time at which a loan is made.
How big is the notional loan?
(2)In determining the amount of the notional loan, the Commissioner must take account of:
(a)the amount the interposed entity lent the target entity; and
(b)how much (if any) of that amount the Commissioner believes represented consideration payable to the target entity by the private company or any of the interposed entities for anything (assuming that the consideration payable equals that for similar transactions at arm's length).
ITAA36 section 109X provides relevantly:
Operation of Subdivision D in relation to payment or loan
Payment or loan not affected by being made through interposed entity
(1)Despite sections 109K and 109L, a private company may be taken under section 109C or 109D to pay a dividend as a result of this Subdivision treating the private company as making a payment or loan to an entity (the target entity), even if:
(a)…
(b)some or all of the amount paid or lent by a private company to an entity interposed between the private company and the target entity is included in the interposed entity's assessable income for a year of income.
The applicant points out that one of the transactions was the payment of a dividend on the E class share from Services to the Finance Trust. That dividend it was said was included in the assessable income of the Finance Trust and ultimately passed through the interposed trust to a company BJ Howard Corporate Pty Ltd.
The applicant submitted that this was a relevant consideration in the exercise of the discretion, if it arises, under ITAA36 section 109RB(2). The occasion for the exercise of that discretion does not arise given my finding as to prerequisite of an honest mistake or inadvertent omission within ITAA36 section 109RB(1).
The applicant also submits, however, that the same facts or circumstances are relevant to the amount determined by the Commissioner under ITAA36 section 109W. That is to say, “the fact that an amount was included in the assessable income of the Finance Trust is an amount to be taken into account by the Commissioner in determining the amount of the notional loan under s.109W.”[51]
[51] Transcript, page 208, 44-47.
The applicant submitted that where an amount is brought to tax, in the hands of another entity whether a company or a trust, then under (or consistent with) the imputation system, the amount the Commissioner should determine under ITAA36 section 109W is nil. Here it was contended that the dividends were included in the assessable income of several entities, first the Finance Trust, then in the assessable income of the BJ Howard Equity Unit Trust, and then in the assessable income of BJ Howard Corporate Pty Ltd.[52] The applicant submitted the issue is one of statutory interpretation.
[52] Transcript, pages 218, 33-36; 233, 32-35.
ITTA36 section 109W(2) stipulates the matters the Commissioner must take into account in determining the amount under subsection 109W(1). The facts or circumstances relied on by the applicant are not so stipulated. At the same time these same matters are referred to in section 109X, where it is provided that a payment or a loan may be treated as a Division 7A dividend, even if the amount paid or lent or any part of it is included in the interposed entity’s assessable income.
I think there is much to be said for the view that, having expressly referred to these matters in the context of ITAA36 section 109X, the legislature could be expected to have provided some indication that the Commissioner should or could take these same matters into account in determining the amount under section 109W, if that were intended.
I also take into account the limited circumstances, under ITAA36 section 109RB, in which the Commissioner is empowered to disregard the operation of Division 7A in respect of a particular dividend, or to decide that the dividend is franked, and that subsection 109RB(3) then provides that the Commissioner must have regard to certain facts or circumstances, including “any other matters that the Commissioner considers relevant.”
Reading the legislation as a whole, it seems to me that the facts or circumstances relied on by the applicant are matters which could be considered relevant in the exercise of the discretion under ITAA section 109RB, where it arises. I think the determination under section 109W is of a different nature. I also take into account the respondent’s submission that it was not intended, in determining the amount under section 109W(1), that the Commissioner should cast around to see what the interposed entity, and less still its shareholders or beneficiaries, might have included in their assessable income. Having regard to what the Commissioner is required to take into account in determining the amount under section 109W, it is reasonably clear that the matters raised by applicant are not a relevant consideration.
Taking all these matters into account, particularly the way in which the facts or circumstances relied on by the applicant are dealt with in section 109X, what the legislature requires the Commissioner to take into account in ITAA36 section 109W(2), and what I have said concerning exercise of the discretion under section 109RB, I do not consider those matters enter into the determination of the amount under section 109W(1).
Penalty
The Commissioner issued the penalty on the basis that the applicant did not have a reasonably arguable position, pursuant to TAA Schedule 1, section 284-15. The test is objective, namely, under subsection (1), whether, “having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect.”
Subsection 284-15(2) of the TAA provides:
(2)To the extent that a matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, had the Commissioner exercised the discretion in the way assumed, a court would be about as likely as not to decide that the exercise of the discretion was in accordance with law.
The applicant submits that the primary source of dispute is a complicated factual dispute involving an analysis of whether the loan made by the Finance Trust to the applicant (and related transactions) occurred in the 2009 or 2010 income year.
The applicant submitted that, even if this contention were not ultimately accepted, the weight of evidence indicates that the impugned transactions occurred in the 2009 income year, and hence ITAA36 Division 7A had not operation in the 2010 income year. That position, it was submitted, was clearly reasonably arguable.
The applicant submitted that the test whether a taxpayer’s position is reasonably arguable is whether, on balance, the position can objectively be one that, while wrong, could be argued on rationale grounds to be right.[53]
[53] Cameron Brae Pty Ltd v Commissioner of Taxation (2007) 161 FCR 468, 488 (per Stone & Allsopp JJ).
The applicant also contended that the the matters in dispute were reasonably arguable and thus not subject to an administrative penalty for the following reasons:
(a)the arguments presented as to the non-operation of Division 7A on the facts are as least likely to be correct as incorrect;
(b)in reviewing the operation of Division 7A, the imposition of penalties would accordingly be unreasonable; and
(c)there is a lack of judicial authority on point, and many of the so-called principles contained in the respondent’s public rulings on point have not been tested hence mere non-compliance with any such ruling cannot, ipso facto, lead one to conclude that the position taken by the applicant is not reasonably arguable.
As the respondent points out, however, the factual dispute concerned matters within the knowledge of the applicant. The facts, once ascertained, meant that the applicant’s primary argument concerning the timing of certain transactions, in particular the loan from the Finance Trust to the applicant, was not as likely to be correct as incorrect.
The critical issue was the loan agreement between the Finance Trust and the applicant. The written Loan Agreement was not brought into existence until May 2010. There was no note, memorandum, record, or any other contemporaneous written evidence supporting the making of the loan in the 2009 income year. The argument on behalf of the applicant was that the amount of the loan, that is, in his primary argument, included amounts which were not known except in the subsequent income year.
It is unnecessary to recount the evidence on this issue. There were a lot facts but it was not a complicated factual dispute and, based on the evidence known to the applicant, it was not a case in which his argument was as likely to be correct as incorrect. I also refer to my comments on the evidence of the applicant and Mr Toohey which went to the accuracy of what they could recall and their credibility.

The issue concerning the exercise of the discretion under ITAA36 section 109RB also turned on a factual finding and again it could not be said that, on the facts, as known to the applicant, his argument was as likely to be correct as incorrect.
The matter of statutory interpretation of ITAA36 section 109W was a new issue. There is apparently no authority on the argument which the applicant raised. I do not think it was as likely to be correct as incorrect so as to satisfy the test of a reasonably arguable position.
Remission
The applicant contends there should be remission of the penalty, contending that the respondent failed to exercise his discretion appropriately in terms of TAA, Schedule 1, section 298–20(1).
It was contended that the respondent failed to take into consideration relevant factors, such as those outlined in Rowntree v Federal Commissioner of Taxation.[54]
[54] (2016) 103 ATR 482, [86].
The applicant contended any administrative penalty should be remitted in full for the following reasons:
(a)the penalty outcome is harsh both as to quantum and as a percentage of the primary tax shortfall;
(b)the penalty is unjust, given that the applicant’s position is at the very least, a reasonably arguable position for the purposes of TAA, Schedule 1, section 284-75(2);
(c)the applicant has a good compliance history;
(d)the actions of the applicant cannot, on any reckoning, be regarded as reckless or an intentional disregard of the taxation laws; and
(e)should the penalties stand, it would be patently unjust to the applicant given the nature of the dispute and the financial impact that the additional tax in the form of the penalty would have on the applicant if it were not remitted.[55]
[55] Re Johnston and Commissioner of Taxation (2011) 81 ATR 908.
The respondent submitted in respect of these contentions:
(a)the amount of the penalty is determined by operation of the legislation and as the legislature intended. No harshness could be said to have applied in respect of an apparently wealthy taxpayer;
(b)if a penalty arises, then the applicant’s position was not reasonably arguable;
(c)there is no evidence of the applicant’s compliance history before the Tribunal. However, it is of note that, Toohey Reid’s first instructions from the applicant and his related entities, was to get outstanding tax returns up to date, which is not positive indicia of a good compliance history; and
(d)there is no assertion, on the current case, of recklessness or intentional disregard, and in the circumstances such considerations are not relevant.
Taking the applicant’s and the respondent’s submissions into account I am not satisfied that the respondent failed to exercise his discretion appropriately.
Shortfall interest charge and remission
The applicant submitted the respondent’s calculation of shortfall interest charge (“SIC”) is incorrect because:
(a)the calculation of the interest was based on the respondent’s determination of the applicant’s tax liability, which was calculated from the respondent’s determination of the applicant’s income;
(b)the respondent’s determination of the applicant’s income was excessive;
(c)consequently, the respondent’s determination of applicant’s tax liability was excessive;
(d)there was no tax shortfall in each of the income years; and
(e)the interest needs to be recalculated based on any reductions made to the applicant’s income to correct the respondent’s excessive determination.
The applicant also contended that any SIC should be remitted because:
(a)the respondent’s actions have themselves contributed to the imposition of the SIC;
(b)the applicant’s position is, at the very least, reasonably arguable and as such, not only is the applicant entitled to have the administrative penalty remitted, but also the SIC; and
(c)the circumstances are such that the respondent should bear part of the cost of the alleged delayed receipt of taxes.[56]
[56] TAA, Schedule 1, section 280-160(2)(b).
In response, the Commissioner submitted:
(a)ITAA36 Division 7A is an integrity provision designed to prohibit particular forms of taxpayer behaviour. The actions of the applicant enlivened those integrity provisions by virtue of sections 109T and 109D. The additional tax arising from the assessments are in consequence of the operation of these provisions.
(b)The calculation of SIC was correctly calculated and was based on the correct amount of tax liability. There is no evidence to the contrary beyond a bare assertion.
(c)During audit, the Commissioner remitted an amount of SIC in consequence of a delay in commencing an audit. The Commissioner also remitted an amount of SIC in consequence of a delay incurred as part of the audit process.[57]
(d)Such remissions are in line with TAA, Schedule 1, section 280-160(2)(b) and appropriate in the circumstances.
(e)For the reasons previously submitted, the applicant’s arguments were not as likely to be correct as incorrect, and do not form a basis for remission of SIC.
(f)The suggestion by the applicant that ITAA36 section 109T remains beyond the ‘control’ of the applicant is without merit. The applicant controlled the facts to which section 109T applied.
[57] Exhibit 1, T Documents, T9, pages 142- 143.
I accept the respondent’s submissions and accordingly consider the SIC was correct and there is no reason for remission.
CONCLUSION
The objection decision dated 26 June 2017 is affirmed.

113. I certify that the preceding 112 (one hundred and twelve) paragraphs are a true copy of the reasons for the decision herein of Deputy President I Molloy

...........................................................
Associate
Dated: 11 July 2019

Dates of hearing:

7 and 8 February 2019; 1 March 2019 and
12 April 2019

Counsel for the Applicant:

Mr T Murphy QC

Mr A Anderson

Agency for the Applicant:

Toohey Reid

Counsel for the Respondent:

Mr P Looney QC

Mr M Ballans

Solicitors for the Respondent:

Australian Government Solicitor

Pre-audit Taxable Income	Adjustment (increase in taxable income)	(A) Tax Shortfall Amount / Additional Tax	(B) Penalties	(C) Shortfall interest charge	Total Amount Payable = A+B+C
$227,230	$3,454,290	$1,606,244.85	$401,561.20	$347,281.98	$2,355,088.03

Dates of hearing:	7 and 8 February 2019; 1 March 2019 and 12 April 2019
Counsel for the Applicant:	Mr T Murphy QC Mr A Anderson
Agency for the Applicant:	Toohey Reid
Counsel for the Respondent:	Mr P Looney QC Mr M Ballans
Solicitors for the Respondent:	Australian Government Solicitor