Kahlon Estate Wines Pty Ltd as Trustee of the Kahlon Family Trust and Commissioner of Taxation (Taxation)

[2021] AATA 2872

Kahlon Estate Wines Pty Ltd as Trustee of the Kahlon Family Trust and Commissioner of Taxation (Taxation) [2021] AATA 2872 (12 August 2021)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):      2017/7406, 2017/7407 & 2017/7408

Re:Kahlon Estate Wines Pty Ltd as Trustee of the Kahlon Family Trust

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Senior Member Dr N A Manetta

Date:12 August 2021

Place:Adelaide

The Tribunal sets aside the decision under review and remits the matter to the respondent for reconsideration in accordance with paragraphs [32] to [33] of the attached reasons.

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Senior Member Dr N A Manetta

TAXATION – A New Tax System (Wine Equalisation Tax) Act 1999 - WET exemptions claimed – inadequate understanding of WET procedural requirements and documentation – penalties properly imposed - decision set aside and remitted for reconsideration to enable respondent to rectify certain errors

Legislation

A New Tax System (Wine Equalisation Tax) Act 1999

Taxation Administration Act 1953

REASONS FOR DECISION

Senior Member Dr N A Manetta

12 August 2021

1. This is an application by Kahlon Estates Wines Pty Ltd (as trustee of the Kahlon Family Trust) in respect of certain taxation assessments raised retrospectively against it by the respondent Commissioner of Taxation after the Commissioner’s officers conducted an audit of its affairs.  “Kahlon Estates Wines” operated as a vineyard and commercial winery. The person in charge of the applicant’s commercial operations was Mr Mohinder Singh Kahlon, who appeared before me on behalf of the applicant. Ms Battiste appeared on behalf of the respondent. 

2. The application to the Tribunal comes about in the following way.  The applicant was audited in respect of its compliance with the Wine Equalisation Tax regime for the period 1 July 2013 to 31 March 2016 (R1 at pp 114ff).  An obligation to pay tax in this regard arises under the A New Tax System (Wine Equalisation Tax) Act 1999 (“the Act”).  The result of the audit was a finding that a significant amount of tax that ought to have been paid under the Act in the audited period was not paid. In addition, goods and services tax was not paid. Some $157,997 of unpaid tax was discovered. Penalties were applied totalling some $47,927.

3. An objection to this assessment was lodged by the applicant, and the result of that objection process was, as I understand the material lodged before the Tribunal, a reduction of the amount owing in respect of underpaid tax by $36,134 and a reduction in the amount of penalty by $10,814.70 (to reflect the lesser amount of unpaid tax).  Accordingly, the applicant was partly successful, but partly successful only.  A substantial amount of unpaid tax was still found to be owed, and a penalty was applied to this amount on the basis that the applicant had failed to show reasonable care. 

4. The applicant has applied to this Tribunal in respect of the assessments of tax and penalty (as modified at objection stage).

   STATEMENT OF CONCLUSION

5. My conclusion is that I accept the respondent’s contentions in this matter.  I would have proceeded formally to affirm the decision under review, but for the respondent’s indication in its submissions (in Exhibit R4) that certain adjustments in the applicant’s favour are proposed to be made.  These are detailed at the end of these reasons.  I shall give effect to this intention by setting aside the decision under review and remitting the matter to the respondent to make these adjustments in the applicant’s favour.

   BACKGROUND FACTS AND KEY FINDINGS

6. I set out now the background facts and certain essential findings.  Mr Kahlon gave evidence before the Tribunal, and he called the applicant’s part-time bookkeeper, Mr Peter Brown. Mr Kahlon is not fluent in English and an interpreter assisted him at the hearing. Mr Kahlon was born in 1954 in India and married there, but emigrated alone to Australia in 1975.  His wife and two children followed him in 1979. 

7. Mr Kahlon arrived in Melbourne in January 1975 but moved quickly from there to Shepparton, in regional Victoria, where he began work as a fruit-picker.  He also picked apples in Batlow, New South Wales, and then worked, he said, in a factory making cartons and plastic chairs.  Mr Kahlon gave evidence that, as he had run an agricultural enterprise in India, he was keen to do the same in Australia.  He said he sold up a home he owned in Melbourne and bought a property comprising some 60 acres of grape vines, near Monash in Victoria as I understand his evidence.  Part of this property was sold, as I understand his evidence, in 1989, and he moved his family to Renmark in SA.  He had bought an orange farm there because, he said, the price of oranges had increased. 

8. In time, he decided to dig up the orange trees and plant vines.  The enterprise in Renmark was substantial and comprised some 400 acres of grapes and some 100 acres of land devoted to a winery.  As I understand Mr Kahlon’s evidence, he no longer holds any commercial stake in any of his former agricultural enterprises, and has not done so for some years. 

9. “Kahlon Estates Wines” was founded in 2003 according to Mr Kahlon, at the same time he constructed a winery on the property at Renmark.  Before 2003, Mr Kahlon said he sold his grape crop to others including, as I understand his evidence, a type of co-operative known as “Berri Wines” in which he had a commercial stake (along with other growers). 

10. From a legal perspective, I understand the vineyard and winery operated in a conventional way for a family enterprise; that is to say, through a family trust whose trustee is a corporate entity (the applicant in these proceedings).  Mr Kahlon and his wife were the sole shareholders of the corporate trustee according to Mr Kahlon. In a practical sense, Mr Kahlon, together with his wife, were the controllers of the enterprise.  Mr Kahlon and his wife appear to be the only people interested financially in Kahlon Estate Wines (although I assume discretionary distributions under the trust in favour of family members might have been permissible).  Mr Kahlon’s spouse appears to have had no active involvement in the vineyard and winery business and was not called to give evidence before me.

11. It would appear that the registration of the applicant under the Act was effected by Mr Kahlon’s winemaker in 2004. That was Mr Kahlon’s evidence to me, which I accept. Cross-examination revealed Mr Kahlon was aware of the taxation regime under the Act, if only in the broadest of terms. He knew exemptions were being claimed by his winemaker on the applicant’s behalf in respect of tax that was otherwise payable. Mr Kahlon did not take an active role, however, in arranging for appropriate documentation to be obtained and retained for WET-taxation purposes nor for appropriate records to be maintained.

12. In the years before 2013, it was the winemaker who was principally involved in the sale of wine and the claiming of exemptions under the Act. Mr Kahlon said he would be consulted about the sale price and he would have to approve the price before the transaction could go ahead; but all the dealings were completed by the applicant’s winemaker. The winemaker, in the years immediately preceding the audited years was a Mr Tosh. Mr Tosh came from the Punjab region in India. He had excellent English and, in addition, could speak with Mr Kahlon in the latter’s first language. Mr Tosh was, as I understood Mr Kahlon’s evidence, largely responsible for the operation of the winery business and all its paperwork. I accept that evidence. Mr Tosh was also responsible for liaising with Mr Brown, the part-time accountant and bookkeeper Mr Kahlon had engaged.

13. As I understand Mr Kahlon’s evidence, Mr Tosh left the winery abruptly at the end of 2012 or in early 2013 after a dispute with Mr Kahlon over pay.  Thereafter Mr Kahlon took over the winemaking operations himself.  Mr Kahlon would liaise with Mr Brown, but it was clear Mr Brown had a very limited role in the conduct of the winery’s affairs: he was engaged as an accountant or bookkeeper for a total of four hours per week only.

14. Mr Tosh’s departure was a significant event for the enterprise. Mr Kahlon says that Mr Tosh gave a week’s notice only of his intention to leave after his pay dispute.  I infer the departure was not amicable.  Mr Tosh had been earning some $70,000 per annum but wanted $100,000. Mr Kahlon did not speak with Mr Tosh after the latter’s departure. 

15. Importantly, Mr Kahlon did not at that point seek any professional review of the applicant’s business operations to ensure their compliance with taxation laws including the regime under the Act. He did not speak with Mr Tosh, as I have said, after the latter left. His evidence to me was that he was unsure how much knowledge Mr Brown had about the wine-making business and its taxation obligations. That was surprising evidence, because the need for a competent substitute would have been a pressing issue after Mr Tosh’s departure. Mr Kahlon decided to run the business himself with only a vague understanding of the regime under the Act.

16. Mr Brown, to whom I have already referred, was a former H&R Block employee, whom Mr Kahlon had met in the early 1980s.  As I have said, Mr Kahlon had engaged Mr Brown on a four-hour-per-week basis to do the applicant’s bookkeeping.  He was already performing this task when Mr Tosh left. 

17. Mr Kahlon’s evidence to me was that he did not involve himself in the paperwork of the business either before or after Mr Tosh’s departure.  He would sometimes countersign forms, but these were prepared for him by Mr Brown. 

18. Mr Brown also gave evidence to the Tribunal, some of which it is convenient to recapitulate here. He gave evidence, which I accept, that he did not have a clear understanding of the documentation that needed to be kept in order to claim a WET exemption.  This understanding only came to him subsequently and as a result of the taxation audit undertaken by the respondent. That is a significant matter.  He gave evidence that at the time Mr Tosh left, he had had no experience in accounting for wine sales.  He made no inquiries in respect of the WET system with the ATO.  As I have noted, he was engaged for four hours per week only, and he said he did not speak with Mr Kahlon about WET issues given the limited number of hours he worked.

    Key findings

19. At this point, it is convenient to set out certain key findings of fact about the operation of the vineyard and winery. After Mr Tosh left at the end of 2012 or in 2013, Mr Kahlon took over the operations of the winery as winemaker and chief salesperson. He did not take any active steps, however, to better his understanding of the WET regime’s documentary requirements. The sole person who had an adequate grasp of these requirements had left after a pay dispute, leaving a very serious gap in knowledge. Mr Kahlon did not seek or obtain instruction from Mr Tosh about the WET-side of the business. He did not contact the ATO to ensure he gained an adequate understanding of the relevant documentation requirements. He did not ensure he engaged someone after Mr Tosh’s departure with experience in WET-accounting procedures to ensure proper documentation was kept in compliance with the Act’s legal requirements.

20. It is quite clear to me that Mr Kahlon must have appreciated his own lack of knowledge in this regard, and yet he took a decision not to inform himself or to pay someone with appropriate expertise to assist him. There is no doubt in my mind that Mr Kahlon, who effectively ran the corporate trustee and the business, had decided to assume the day-to-day running of the business himself without any intention of ensuring regulatory requirements under the Act were adequately met. In essence, he decided to continue to claim WET exemptions without informing himself what documentation was required to be kept.

    PENALTY TAX

21. In these circumstances, any penalty that has been imposed by the respondent as a result of a failure by the applicant to pay appropriate tax to the respondent is justified in my opinion.  In particular, I do not think Mr Kahlon can simply say that the applicant’s continued employment of Mr Brown as a bookkeeper on a four-hour a week basis was an adequate response by the applicant to its obligation to meet ATO’s regulatory requirements after Mr Tosh left.  Mr Tosh was clearly a key employee.  Mr Brown has confirmed that he had no detailed understanding of the WET system.

22. Mr Kahlon’s general submission to me was that he was not aware of the WET requirements and that these matters had been handled by Mr Tosh who left.  I accept that submission.  He conceded in his final submission to me that the winery was his business in a practical sense (although it was being run through a corporate trustee); but his further submission was that he thought he had employees who were taking care of matters and he could not do more than that. 

23. I reject this latter submission quite firmly.  At the risk of labouring a point, Mr Kahlon could have been under no illusion after Mr Tosh left that the applicant now lacked any practical understanding of the WET regulatory requirements with which Mr Tosh had been dealing to that point.  As I have said, Mr Kahlon decided not to engage another person to address those requirements. He could not realistically expect Mr Brown to handle those requirements given Mr Brown’s very limited retainer to work four hours per week. Indeed, he did not even inquire whether Mr Brown had a good understanding of the requirements.  Had he done so, he would have clearly appreciated the lack of knowledge Mr Brown had.

24. Accordingly, if WET has been underpaid, I find that the penalty was properly imposed through the applicant’s carelessness.  The applicant must bear the consequences of Mr Kahlon’s conduct in this regard.

    RIGHT TO AN EXEMPTION

25. The next question is whether the applicant has wrongly claimed an exemption under the Act and underpaid WET. I accept the respondent’s submission that the effect of s 14ZZK of the Taxation Administration Act 1953 is to require an applicant before this Tribunal to justify his or her or its objection to an assessment.  I intend no disrespect to Mr Kahlon, but he was largely unable to give a reasoned account of the applicant’s objection to the audit assessment (as adjusted on review).   

26. The only serious objection that has been raised is the taxability of a number of sales by the applicant to companies that planned to on-sell the wine or export it. The legal regime under the Act operates in the following way in this regard. If a purchaser “quotes” for an eligible sale at or before the time of sale, the transaction is not taxable: see s 7-10(1). A purchaser of wine is legally entitled to make a quote for a future purchase of wine in a number of circumstances set out in s 13-5. These four circumstances are as follows:

    (a)The purchaser who quotes intends to on-sell the wine by wholesale or by an indirect marketing sale while the wine is in Australia;

    (b)The purchaser who quotes is mainly a wholesaler and intends to sell the wine in Australia by whatever means;

    (c)The purchaser who quotes intends to use the wine as a material in another manufacturing or processing procedure;

    (d)The purchaser who quotes intends to supply the wine is a GST-free manner. 

27. The quote, however, may not be made later than the time of the dealing with the supplier and it must be in an approved form: see s 13-20.  

28. If a quote is lawfully made, the supplier is entitled to an exemption in respect of the payment of tax.  However, if the quote is made later than the actual dealing, there can be no exemption claimed by the supplier, and WET is payable.  The exemption system in this regard is intended to operate at a practical level by requiring a supplier to ensure that at the time of the dealing, it has the purchaser’s quote details in an approved form; otherwise, tax is payable. 

29. Many of the transactions brought to tax by the respondent where Mr Kahlon has adverted to an objection involve a circumstance where the requisite quote-form was filled out and obtained after the dealing and backdated.  This was arranged by Mr Brown in an attempt to meet the requirements for a WET-exemption retrospectively.  It is quite clear that the applicant cannot achieve an exemption in this manner: cf s 13-30(b).  

30. Mr Kahlon, as I understood his submission on behalf of the applicant, claimed that these transactions, subsequently documented, would have been exempt, and the applicant has now furnished honest, albeit late, proof of them by way of the requisite form duly completed by the purchasers. In my opinion, this submission should not be accepted. The intended smooth operation of the Act is ensured by its key legal requirement concerning documentation. The Act requires a purchaser to “quote” by way of an approved form, and the quote must be made at the time of the dealing at the latest. Clearly, it is critical for a supplier who intends to claim a WET-exemption to have the requisite form amongst its records at the time of the dealing, and not later. Having been found not to have the requisite forms by the respondent’s officers, a supplier cannot then seek to have those forms created and signed so as to give the supplier, retrospectively, an entitlement to an exemption that did not arise by law at the earlier time. It does not matter whether the dealing would have been exempt had there been a quote in accordance with the Act’s requirements. The Act is quite clear in its requirements in this regard.

31. All in all, I must say that the overwhelming impression I had was that Mr Kahlon chose to run a significant enterprise after Mr Tosh’s departure without ensuring he had an adequate understanding of the regulatory requirements imposed under the Act. As an alternative to a personal understanding, Mr Kahlon might have employed a person who had a reliable understanding, but he chose not to do so. The applicant’s enterprise was significant and so the failure to comply with the Act cannot be viewed simply as the error of a small-time novice in a complex industry. I have used the word “chose” advisedly given Mr Kahlon’s submissions. Although Mr Kahlon’s submission largely sought to disown personal responsibility for the applicant’s operations, Mr Kahlon was in fact, on the evidence before me, the only person responsible for them during the audited period, and the applicant’s failure to comply with the Act is the result of the choices he made on the applicant’s behalf.

    FURTHER RECTIFICATION OF THE ASSESSMENT

32. The respondent alerted me to a calculation error it says it made at objection stage that it wishes to rectify in the applicant’s favour: see paragraph [12] of Exhibit R4.  The respondent also indicated to me an intention to revise its assessment in the applicant’s favour having regard to further information provided by the applicant.  This proposed revision is detailed in paragraph [13] of Exhibit R4. 

33. I am content to give effect to these intentions, which, as I say, favour the applicant. I shall set aside the decision under review and remitting the matter to the respondent so that the respondent can make the revisions referred to in paras [12] to [13] of Exhibit R4.  I make clear, however, that the substance of the applicant’s application to the Tribunal has been unsuccessful.

34.     I certify that the preceding 33 (thirty three) paragraphs are a true copy of the reasons for the decision herein of Senior Member Dr N A Manetta.

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Administrative Assistant Legal

Dated: 12 August 2021

Date of hearing:	14 September, 8, 13 October & 6 November
Advocate for the Applicant:	Mohinder Singh Kahlon
Advocate for the Respondent:	Josephine Battiste