J & M Hirezi and H & I & N & R & R & R Nasrawi and Commissioner of Taxation
[2012] AATA 688
•8 October 2012
[2012] AATA 688
Division TAXATION APPEALS DIVISION File Number(s)
2011/5003
Re
J & M Hirezi and H & I & N & R & R & R Nasrawi
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Bernard J McCabe
Date 8 October 2012 Place Brisbane The Tribunal affirms the decision under review.
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Senior Member Bernard J McCabe
CATCHWORDS
TAXATION – GST – penalties – recklessness – failure to properly account for transactions – liability of taxpayer for work undertaken by professional advisers – insufficient evidence to suggest penalties incorrect – decision affirmed.
LEGISLATION
Taxation Administration Act 1953 (Cth) s284-75(1).
CASES
Johnston and Commissioner of Taxation (2011) AATA 20.
REASONS FOR DECISION
Senior Member Bernard J McCabe
8 October 2012
This case is about penalties. The taxpayers are members of a partnership that developed an industrial estate comprised of a number of lots on the outskirts of Brisbane. The firm was registered for GST purposes but it did not correctly account for GST on the sale of a number of lots in the estate during the periods April 2005 and January 2010. The taxpayers do not dispute there was a shortfall but they object to administrative penalties imposed with respect to some of the transactions pursuant to s 284-75(1) of Schedule 1 of the Tax Administration Act 1953. The penalties in question were assessed at 50% of the amount of the shortfall that arose out of the transaction on the basis the shortfall was the product of recklessness rather than a mere want of reasonable care. The taxpayers say the penalty should have been assessed at 25%. The taxpayers also say the Commissioner should remit a larger part of whatever penalties are assessed. The Commissioner has already remitted 25% of the penalties but the taxpayers have asked for more generous treatment.
I made clear to the taxpayers at the hearing I thought there was little that could be done in relation to the decision to levy penalties at the rate of 50%. I explain my reasons for that view below. But I am ultimately not persuaded the taxpayers have established the Commissioner’s views on remittal are wrong, either.
THE RATE OF THE PENALTY APPLICABLE TO THE SHORTFALL
The Commissioner says the failure to properly account for some of the transactions giving rise to a liability for GST is so egregious that it suggests reckless behaviour on the part of the taxpayers or their agent. The Commissioner said the problems with the business activity statements (BAS) were so obvious that anyone exercising a modicum of care would have realised the law was not being complied with.
One of the taxpayers, Mr Nasrawi, managed the affairs of the partnership and gave evidence at the hearing. He explained he retained an accountant whom Mr Nasrawi believed to be competent. Mr Nasrawi said in his evidence there was no reason to question the paperwork the accountant was producing; it was not until a friend of Mr Nasrawi made claims in 2008 about the tax agent’s behaviour that Mr Nasrawi realised there was a problem. At that point, the accountant was sacked and new advisers brought in who began to look at the former accountant’s work. The new accountants reported the former agent’s work was “a mess”, according to Mr Nasrawi. In due course, he briefed solicitors to advise on the possibility of suing the former tax agent for negligence. Mr Nasrawi was told the action would probably succeed (exhibit 9) but formed the view there was no point suing because the former agent was unlikely to have enough assets to satisfy a judgment against him.
Mr Nasrawi says he was blameless in the management of the partnership’s affairs. He said he employed a competent professional adviser and had no reason to question the work that was being done. He says the taxpayers have effectively been victims of the tax agent.
Unfortunately for the taxpayers, their argument in respect of the decision to levy a penalty at 50% cannot succeed even if I accept their version of what occurred. There clearly is some basis for believing there was reckless conduct on the part of the agent: the solicitor’s advice and the (admittedly hearsay) comments of the new accountant together with the size of the mistakes suggest something was seriously wrong with the way in which the taxpayers’ tax affairs were being managed. I did not hear from the accountant, but that was not surprising in the circumstances. The taxpayers have simply not produced (and probably were unable to produce) evidence that would enable me to say the Commissioner’s conclusions on this point were wrong. Given the evidentiary burden imposed by s 14ZZK(b) of the Act, that means this aspect of their application for review cannot succeed. I therefore affirm the objection decision in that respect.
SHOULD A FURTHER AMOUNT BE REMITTED?
I have already acknowledged the Commissioner decided to remit 25% of the total penalty in view of the taxpayers’ generally good record of compliance. The taxpayers have asked for a more generous approach because:
(a)They say they (or more particularly Mr Nasrawi) were essentially blameless for what occurred and it would be harsh to make them responsible for the consequences of their agent’s failing;
(b)Even if the Commissioner were not inclined to provide relief for taxpayers from the sins of their agents in the ordinary course, it would be harsh to take that approach in this case because the agent was uninsured and had few assets to satisfy a judgment.
Mr Nasrawi said English was not his first language and made much of the fact that he always hired and relied upon competent advisers. He insisted he took appropriate advice at all times and he was not in a position to second-guess the tax agent’s advice. He said he simply signed the documents he was given. He added he was generally aware that amounts were being regularly paid in respect of GST but that he was not in a position to know whether the precise amounts were properly calculated given the timing of settlements of individual properties (by which I assume he meant he was not in a position – or could not reasonably be expected – to know whether amounts were included or left out of the BAS for particular quarterly periods). He added that he got rid of the agent as soon as he became aware of the problem and appointed new agents who have done a good job and assisted the Commissioner to sort out the mess.
I am satisfied Mr Nasrawi was a successful and experienced businessman who has been engaged in the business of property development for many years. I do not suggest he knew (or should have known) the detail of his GST obligations, but he agreed he was aware of those obligations in a general way. He was also the recipient of correspondence from his solicitors in relation to every sale of land which noted the GST liability that arose in each case. He was clearly aware of how many sales occurred, the timing of the sales and the date of settlement in each case. He was also aware of the firm’s finances: he had access to the bank accounts and knew what was going in and coming out, at least in general terms. It is difficult to accept that someone in that position had no idea his accountant was mismanaging things, even if he was not aware of the detail.
As it happens, I am satisfied after seeing and hearing Mr Nasrawi in the witness box that he was not aware of any mismanagement by his accountant. I accept Mr Nasrawi was not being wilfully blind to what was going on. But I am not persuaded he established he was blameless. He said he signed whatever the accountant put in front of him. Surely a businessman of his experience and apparent skill would or should have asked some basic questions about what he was signing? If he had done so, he would have discovered the problems (if they were not covered up by the agent, which would have been a different situation). It follows I do not accept the taxpayers did not contribute (albeit in a small way) to their own misfortune.
That leaves the taxpayers in a weaker position in relation to this claim. Remittal might be considered where it serves no purpose to visit the penalty on the taxpayer, as Senior Member Frost (as he then was) suggested in Johnson and Commissioner of Taxation [2011] AATA 20 [at 19]. If the taxpayers have been blameless in the conduct of their affairs, it might be harsh to visit the consequences of a mistake by the agent on the taxpayer. The Commissioner does not concede it is generally appropriate to remit a penalty when a taxpayer is blameless in the face of an incompetent tax agent, but the Commissioner says that is not the case here anyway. There would be a purpose to leaving the penalty as it is: it would reflect the taxpayers’ failure to be more diligent in their dealings with the tax agent, especially given Mr Nasrawi was an experienced businessman and the business transactions in question were relatively large.
The taxpayers go on to argue there is a further problem if the penalty is not remitted. They say there is no point suing the tax agent because he has no insurance and limited assets. The loss will not be imposed where it properly belongs, they say, and that is harsh.
Mr Clark, for the Commissioner, argued the evidence did not establish there were limited prospects of recovering a judgment against the tax agent. I was told that searches had been done suggesting he had one major asset that was encumbered, but I simply cannot be sure of his financial position. I do not know whether the burden of the penalty would ultimately fall on the taxpayers because legal action would be impractical. I do not think it makes any difference to the argument that the law has subsequently changed to require tax agents to obtain insurance and making other concessions to taxpayers who would otherwise face penalties for bad behaviour by their representatives.
I am not persuaded the Commissioner’s decision is wrong, so it must be affirmed.
CONCLUSION
The objection decision under review is affirmed.
I certify that the preceding 15 (fifteen) paragraphs are a true copy of the reasons for the decision herein of Bernard J McCabe. ................................[Sgd]......................................
Associate
Dated 8 October 2012.
Date(s) of hearing 27 September 2012 Solicitors for the Applicant Mr Heinemann Counsel for the Respondent Mr Clark Solicitors for the Respondent ATO Legal Services
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