Lergou and Commissioner of Taxation
[2009] AATA 292
•28 April 2009
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 292
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/265-270
TAXATION APPEALS DIVISION ) Re MICHAEL LERGOU and
PAT LERGOUApplicants
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr S E Frost, Member Date28 April 2009
PlaceSydney
Decision The applications are reinstated. ...................[sgd]...........................
Mr S E Frost
Member
CATCHWORDS
PRACTICE AND PROCEDURE – application for reinstatement – whether applications dismissed in error – whether reinstatement mandatory or subject to discretion – applications reinstated
TAXATION – GST and income tax – GST matter resolved under s 42C of the AAT Act – income tax not resolved – draft terms of settlement provided to Applicants but not accepted – Applicants directed to accept terms, or suggest alternative terms, or indicate that agreement not likely – direction not complied with – application dismissed for failure to comply with a direction
TAXATION – GST – “net amount” – assessment – what forms part of an assessment of net amount – whether total supplies for GST purposes bears any relationship to income derived for income tax purposes
Administrative Appeals Tribunal Act 1975 – s 42A(5), 42A(10), 42C
Taxation Administration Act 1953 – s 3AA(2); Schedule 1, s 105-5(1)
Income Tax Assessment Act 1997 – s 995-1
A New Tax System (Goods and Services Tax) Act 1999 – s 17-5, 195-1
Re Wilson and Commissioner of Taxation [2007] AATA 1721
Guse v Comcare [1997] FCA 961
Katterns v Comcare [2002] FCA 1366
Re Schramm and Repatriation Commission [1998] AATA 797
Bogaards v McMahon and Another [1988] FCA 161; (1988) 80 ALR 342
REASONS FOR DECISION
28 April 2009 Mr S E Frost, Member Introduction
1. These applications were dismissed on 19 November 2008 under section 42A(5) of the Administrative Appeals Tribunal Act 1975 (“the Act”) because the Applicants had failed to comply with a direction made by the Tribunal.
2. The Applicants have now applied for the applications to be reinstated, in accordance with s 42A(10) of the Act.
3. The question is whether it appears to the Tribunal that the applications were dismissed in error; and if that is the case, whether the Tribunal should exercise the discretion available in s 42A(10) to reinstate the applications.
4. In relation to the first issue, it appears to me that the applications were dismissed in error, As to the second issue, I have decided to exercise the discretion in favour of the Applicants, and to reinstate the applications. My reasons follow.
The Tribunal’s power to dismiss an application
5. There are a number of circumstances in which applications to the Tribunal may be dismissed for some sort of “default” on the part of the applicant. The provisions of the Act that come into play most often are s 42A(2) and s 42A(5).
6. Subsection 42A(2) deals with the circumstance where a party fails to appear either in person or by a representative at a hearing. The Tribunal may, in that event, dismiss the application without proceeding to review the decision under review. However, s 42A(7) provides that before exercising its powers under subsection (2), the Tribunal must be satisfied that the person was given appropriate notice of the time and place of the hearing.
7. Subsection 42A(5) deals with two different sets of circumstances. The first is where the applicant fails within a reasonable time to proceed with the application. The second is where the applicant fails within a reasonable time to comply with a direction that the Tribunal has made in relation to the application. In either case the Tribunal may dismiss the application without proceeding to review the decision under review.
The Tribunal’s power to reinstate an application
8. In respect of an application that has been dismissed under s 42A(2), the applicant may, within 28 days after receiving notification of the dismissal, apply to the Tribunal for reinstatement. Subsection 42A(9) then provides that the Tribunal may reinstate the application “if it considers it appropriate to do so”.
9. The question of reinstatement of an application that has been dismissed under s 42A(5), however, is governed by s 42A(10), and not s 42A(9): Re Wilson and Commissioner of Taxation [2007] AATA 1721. Subsection 42A(10) provides as follows:
If it appears to the Tribunal that an application has been dismissed in error, the Tribunal may, on the application of a party to the proceeding or on its own initiative, reinstate the application and give such directions as appear to it to be appropriate in the circumstances.
10. There are two questions for the Tribunal to consider under s 42A(10). The first is whether it appears to the Tribunal that an application has been dismissed in error. The second is whether, as a matter of discretion, the application should be reinstated.
Why were the applications dismissed?
11. In February 2007 there were applications made to the Tribunal to review objection decisions made by the Commissioner in relation to the following seven matters:
(a) the GST liability (and penalties) in relation to the partnership of Mr and Mrs Lergou for the periods 1 April 2001 to 30 June 2003 and 1 July 2004 to 31 March 2005 (AAT matter 2007/264);
(b) the income tax liability (and penalties) in relation to Mr Lergou for the income years 2001 to 2003 (three matters – AAT matters 2007/265-267); and
(c) the income tax liability (and penalties) in relation to Mrs Lergou for the income years 2001 to 2003 (three matters – AAT matters 2007/268-270).
12. These matters had arisen as a result of an audit conducted by the Commissioner’s officers into the partnership’s affairs.
13. Apparently the partnership (which is treated for GST purposes, but not for income tax purposes, as if it were an entity) operates a retail food outlet selling takeaway cooked chicken, fresh chicken, hot chips, salad and drinks. As a result of the audit, the Commissioner’s officers had formed the view that the income of the retail shop for the relevant periods had been understated in the various Business Activity Statements (“BASs”) and income tax returns lodged by the partnership and by the individual partners. In addition, in relation to GST, the officers had concluded that taxable supplies represented a higher proportion of total sales than the BASs, as originally lodged, had indicated.
14. In relation to matter no. 2007/264, the Tribunal (Senior Member Hunt) made a consent decision on 19 December 2007 under s 42C of the Act. The substantive paragraph of the consent decision provided that the Tribunal “[a]mends the following business activity statements for the quarters identified as follows:”. There followed a table, divided into seven columns with these headings:
· Quarter Ended
· Revised G1
· Revised G3
· Revised Taxable Supply
· Revised 1A
· Reported 1A
· Shortfall
15. The label G1 in a BAS for a quarter represents total supplies; G3 represents GST-free supplies (other than exports); 1A is the GST payable on taxable supplies.
16. The table specified figures in each column, for each of the quarters in the periods mentioned in [11](a) above, with the exception of the quarters ended 31 December 2004 and 31 March 2005. In respect of these two excepted quarters, the consent decision noted that each BAS would be “revised to reflect the BAS as originally reported by the Applicant” (that is, the partnership). I take that to mean that the Commissioner now accepted that the adjustments to those two BASs that were originally proposed by his officers as a result of the audit should not be made.
17. Unlike the GST matters relating to the partnership, the income tax matters relating to Mr and Mrs Lergou personally were not resolved by a decision under s 42C of the Act. So, while matter 2007/264 was now finalised, the remaining six matters were not.
18. It seems that around February 2008, the Commissioner provided to Mr and Mrs Lergou’s then solicitor a set of draft terms which, it was hoped, would form the basis of consent decisions under s 42C for the outstanding income tax matters. However, for whatever reason, the matter did not progress to a point where the Tribunal was asked to make a decision under s 42C.
19. Throughout 2008 there was a series of directions hearings held, with a view to either progressing or resolving the income tax matters. On 26 June 2008, Senior Member Hunt directed that unless terms of settlement were lodged with the Tribunal by 16 July 2008, the income tax matters would be listed for hearing.
20. Terms of settlement were not received. The Tribunal therefore asked the parties to notify their availability for a hearing at some time during September, October or November 2008. They did this by way of the lodgement of hearing certificates. The Commissioner’s representative, no doubt frustrated by the taxpayers’ failure to respond to the draft terms that had been provided to them in February 2008, noted, in addition to the fact that the matter was ready for hearing, that “[a]lternatively these proceedings should be determined by reference to s 42A of the AAT Act”.
21. It seems to have been this notation that led to the scheduling of a directions hearing, which I conducted by telephone on 3 October 2008. The Applicants’ then solicitor attended on behalf of the Applicants. At the directions hearing the Commissioner’s representative explained to me that the taxpayers had failed to respond, over a period of several months, to the draft terms. I was given to understand that the draft terms followed, as it were automatically, from the content of the consent decision in relation to the partnership’s GST matters. Accordingly, I vacated the hearing date of 18 November 2008, and directed instead that the taxpayers were to provide draft consent orders to the Commissioner by 20 October 2008. They did not do so.
22. At a further telephone directions hearing on 27 October 2008, I made directions as follows, in relation to each Applicant:
The Applicant is to provide to the Respondent by 11 November 2008 either:
(a)Acceptance of the draft terms of agreement previously provided to the Applicant by the Respondent; or
(b) Alternative draft terms of agreement; or
(c) A notice that terms are not likely to be agreed between the parties.
23. In the case of each Applicant, the following note, in bold type, was attached to those directions:
NOTE
1. If the Applicant provides a notice under paragraph (c) then the matter will be listed urgently for further directions.
2. If this direction is not complied with, the Tribunal may, without further notice, dismiss the application under section 42A(5) of the Administrative Appeals Tribunal Act 1975 without proceeding to review the decision.
24. The Tribunal next received a letter dated 29 October 2008 from the Applicants’ solicitor. That letter was in the following terms:
The instructions for us to act for the applicants have been withdrawn. We have complied with the directions made by Member Frost on the 27 October 2008.
25. Despite the directions I made on 27 October 2008, the Applicants provided nothing to the Commissioner by 11 November 2008. I was further informed on 19 November 2008 that the Applicants had still not provided anything to the Commissioner. They had also made no contact with the Tribunal. Accordingly, I asked my associate to contact the former solicitor to enquire whether the Applicants had been made aware of the directions dated 27 October 2008. My associate prepared the following file note:
Spoke with [the Applicants’ former solicitor] to enquire whether (a) his clients were made aware of the direction, and (b) whether they were made aware of the note to the Direction.
He responded in the affirmative by saying that when he wrote to the Tribunal on the 29th October 2008, he also wrote to his clients enclosing the Direction and Note by Member Frost.
26. On 19 November 2008, I dismissed the applications under 42A(5) of the Act for failure to comply within a reasonable time with the directions dated 27 October 2008. It is to be noted that it was also the case that they had still not complied with the direction dated 3 October 2008.
Does it appear to the Tribunal that the applications were dismissed in error?
27. Mrs Lergou claims in a written statement that she and her husband did not immediately become aware of the directions dated 27 October 2008. She concedes that she picked up from the solicitor’s office, on or around 29 October 2008, a bundle of paperwork that may have included a letter addressed to her and her husband, but she handed the entire bundle of paperwork to her accountant, Mr Bekiaris, without looking at it. She says that she did not know that the matter had been dismissed on 19 November 2008 until Mr Bekiaris phoned her to inform her. He had apparently phoned the Tribunal about “the listing date of 27 November 2008” and had been told that the matter had been dismissed. Mr Bekiaris had thought that the matter was listed for 27 November 2008 because it was that date, rather than the correct date of 27 October, that the solicitor had specified in a letter to the Lergous following the directions hearing on 3 October 2008.
28. Mrs Lergou paints a picture of almost total ignorance of the events of 2008. She says that she and her husband were aware of the finalisation of the GST matter, but their understanding of the remaining applications was that the income tax matters had somehow been removed from the Tribunal and were now being negotiated by their solicitor, directly with the Commissioner’s office. It came as a complete surprise that the income tax matters were dismissed, because up to that point, Mrs Lergou says, she and her husband were not even aware that the matters were still before the Tribunal.
29. Although Mrs Lergou’s statement is largely untested, it is corroborated to some extent by a written statement made by Mr Bekiaris. He says that communications from the former solicitor were infrequent and confusing. He says that from time to time the solicitor asked him to provide information, often at short notice, but he, Mr Bekiaris, was not kept fully informed as to progress.
30. The Commissioner approached the former solicitor for his version of events. He indicated that he would not be prepared to make a statement unless the Applicants waived privilege. This they were not prepared to do.
31. Ultimately, I indicated to the parties that I had serious doubts as to whether the Applicants had received notice, in a timely fashion, of the directions dated 27 October 2008. It also appeared to me that, if I were to accept their claims, they had been largely unaware of what was going on in the Tribunal. Moreover, I was uneasy, on reflection, that I had not given them the opportunity to explain to me why they had failed to comply with the directions: see for example the comments of Burchett J in Guse v Comcare [1997] FCA 961; see also Katterns v Comcare [2002] FCA 1366.
32. None of the Commissioner’s written submissions have swayed me from my preliminary view. It appears to me that I dismissed the applications in error.
33. That leads me to a consideration of the second element of s 42A(10) of the Act – namely, whether, as a matter of discretion, I should reinstate the applications.
Should the applications be reinstated?
34. Ms L McBride of counsel, who represents the Applicants in relation to the reinstatement application, says that there is no discretion to be exercised once the first element of s 42A(10) – the dismissal in error – is found to exist. She says that in the context of s 42A(10), “may” means “must”. I do not accept that submission.
35. In Re Schramm and Repatriation Commission [1998] AATA 797, the Tribunal considered the factors that might be considered in the exercise of the discretion to reinstate under s 42A(10) of the Act. In that case both parties submitted that the use of the word “may” in s42A(10) “would appear to confer on the Tribunal a discretionary power to reinstate” (at [5]). I agree with that view. That is how the question of reinstatement under s 42A(10) is generally approached, and I propose to approach the question in that way.
36. The main reason why, according to the Commissioner, the applications should not be reinstated is set out in paragraphs 17 to 19 of the Commissioner’s written submissions, as follows:
[17] The Respondent submits that the Applicants’ applications for review are futile. The applications which are sought to be reinstated are entirely related to an application with respect to the Pat and Michael Lergou Partnership [Tribunal Reference 2007/264] (“the Partnership Application”) which was dealt with by way of a decision by consent pursuant to s 42C of the Act in December 2007.
[18] The terms of the s 42C agreement in the Partnership Application set out amounts as agreed between the parties in respect of the Business Activity Periods from the quarters ended June 2001 to June 2003, and the quarter ended September 2004. The amounts agreed between the parties were in respect of the revised G1 (Total sales), revised G3 (Other GST-free sales), Revised Taxable Supply, Revised 1A (GST on sales or GST instalment), Reported 1A, Shortfall and Penalty. Therefore the income and GST liability of the partnership has been determined and cannot be revisited, as supported by the case of Bogaards v McMahon and Another (1988) 80 ALR 342. In that case, the Federal Court considered whether the Tribunal was able to review matters contained in previous consent orders while hearing the fresh application. Pincus J held that the Tribunal could not review the determination on the ground sought to be raised, because it had already dealt with that precise dispute.
[19] The applications sought to be reinstated are those of Mr and Mrs Lergou individually. The only matters relevant to these applications are the consequential amendments as a result of the determination of the Partnership Application. The Respondent submits that the net partnership income included in the Applicants’ individual income tax assessments for the income years ended 30 June 2001 to 30 June 2003 were calculated by reference to the amounts agreed upon in the s 42C agreement in the Partnership Application. The Partnership Application has been finalised and the amendments pursuant to the decision have been effected by the Respondent. The amounts agreed between the parties in the Partnership Application are final and cannot be overturned in the applications of review for [sic] the Applicants’ individual income tax assessments.
37. I do not agree with that submission.
38. The application that was dealt with by way of the consent order in December 2007 was the application by the partnership for review of the objection decision made by the Commissioner in relation to the Commissioner’s assessment, for a number of reporting quarters, of the partnership’s net amount under the former s 22(1) of the Taxation Administration Act 1953 (“the Administration Act”). That provision has been replaced, without relevant change, by s 105-5(1) in Schedule 1 to the Administration Act. Subsection 105-5(1) provides as follows:
The Commissioner may at any time make an assessment of:
(a) your *net amount, or any part of your net amount, for a *tax period; or
(b) …
39. By a circuitous definitional path taking in s 3AA(2) of the Administration Act, s 995-1 of the Income Tax Assessment Act 1997 (“the ITAA”) and s 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (“the GST Act”), one arrives at the following definition of “net amount” in s 17-5(1) of the GST Act:
The net amount for a tax period applying to you is worked out using the following formula:
where:
GST is the sum of all of the GST for which you are liable on the *taxable supplies that are attributable to the tax period.
input tax credits is the sum of all of the input tax credits to which you are entitled for the *creditable acquisitions and *creditable importations that are attributable to the tax period.
For the basic rules on what is attributable to a particular period, see Division 29.
40. Subsection (2), dealing with adjustments, does not appear to be relevant here.
41. It will be seen that, subsection (2) aside, there are only two components of a taxpayer’s net amount for a tax period. The first component is the GST payable, and the second component, which is subtracted from the first, is the input tax credits that are available.
42. It is strange that “GST” for a tax period is identified as the GST “on the taxable supplies that are attributable to the tax period”, since an examination of Division 29 of the GST Act confirms that “taxable supplies” are not attributable to tax periods. In terms of Division 29, there are only three things that are attributable to tax periods. They are GST, input tax credits and adjustments: see s 29-5 for GST, s 29-10 for input tax credits and s 29-20 for adjustments. “Supplies” and “acquisitions” are not attributable to tax periods.
43. The only sensible way to read that part of the definition of “net amount” in s 17-5 that refers to GST is to read the reference to “GST for which you are liable on the taxable supplies that are attributable to the tax period” as if it were a reference instead to “GST for which you are liable that is attributable to the tax period”.
44. Similarly, “input tax credits” in the definition of “net amount” must be “input tax credits to which you are entitled that are attributable to the tax period”.
45. What is clear, in the context of an entity that makes both taxable supplies and supplies that are GST-free, is that the ascertainment of the value of GST-free supplies forms no part of the assessment of net amount. Moreover, given that, for a taxpayer such as the Lergou partnership, the value of total supplies is equal to the sum of taxable supplies and GST-free supplies, it must follow that the ascertainment of the value of “total supplies” also forms no part of the assessment of net amount.
46. Neither of these conclusions is surprising. The draftsman chose, in the formulation of the GST law, not to provide rules attributing supplies or acquisitions to particular tax periods. Instead it was decided that the GST on those supplies, and the input tax credits on those acquisitions, would be attributed to tax periods.
47. One of the consequences of this approach is that there is no rule in the GST law to determine the tax period to which a supply, whether a taxable supply or a supply that is GST-free, is attributed. How, then, can a taxpayer determine when it should report the value of a GST-free supply that it makes? The supply itself is not attributed to a tax period, and since there is no GST payable on the supply, there is no instruction in the GST Act as to the tax period in which the supply should be reported. To put it another way, the figures in labels G1 and G3 of a BAS, in the absence of a rule specifying that they belong to any particular tax period, can provide no meaningful input to the assessment of an entity’s net amount for a tax period. In fact, it is doubtful whether the figures have any real meaning at all.
48. The Commissioner has sought to equate “total supplies” at label G1, as reflected in the consent order in matter 2007/264, with “income derived”, a concept which is full of meaning in an income tax context but which has no parallel in a GST context. The GST Act does not talk of derivation of income, but of markedly different concepts – attribution of GST, attribution of input tax credits and attribution of adjustments. There is no congruence between the rules for derivation of income and the rules for attribution of GST, input tax credits and adjustments. To suggest that the revised G1 figures in the consent order represent the partnership’s income, as established by the ITAA to have been derived in the corresponding periods, is misplaced.
49. It follows that the principle in Bogaards v McMahon, referred to in paragraph 18 of the Commissioner’s submissions ([36] above), does not apply in the current case. Although the consent order purported to revise the G1 figures, the revisions of those figures had no effect on the ascertainment of the partnership’s net amount.
50. In matter 2007/264 it was the partnership’s net amount that was the subject of the objection decision, and it was the objection decision that was subject to review in the Tribunal. The ascertainment of the value of total supplies could not have been part of the dispute between the parties in relation to the assessment of net amount. It is therefore wrong to suggest that the ascertainment of the value of total supplies was part of the “precise dispute” resolved by the consent order.
51. It is not the case that the partnership’s income was determined in matter 2007/264. It does not follow from the consent order that the Applicants’ individual income has been finally determined.
52. In the circumstances it is appropriate to reinstate the applications.
I certify that the 52 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Member
Signed........................[sgd].......................................................
AssociateDates of Reinstatement Hearing 10 February, 23 and 31 March 2009
Date of Decision 28 April 2009
Counsel for the Applicant Ms L McBride
Solicitor for the Respondent Ms Wei-Li Su, ATO Legal Services
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