MR CLIVE CRADDON and COMMISSIONER OF TAXATION
[2011] AATA 790
•9 November 2011
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2011] AATA 790
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2011/1351
TAXATION APPEALS DIVISION ) Re MR CLIVE CRADDON Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Senior Member C Walsh Date9 November 2011
PlacePerth
Decision The Tribunal affirms the decision under review.
..(sgd) C Walsh......
Senior Member
CATCHWORDS
GOODS AND SERVICES TAX – applicant claimed input tax credit in BAS – contract of sale terminated due to default by applicant – purchase price unpaid by applicant – sale not completed – applicant accounts for GST on cash basis - tax shortfall penalty assessment issued by Commissioner – statement false or misleading in a material particular – recklessness – intentional disregard of tax law – whether Commissioner should exercise discretion to remit administrative penalty in whole or part
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 – section 9-5 - Divisions 29 – section 29-10(2) – section 29-10(3)
Taxation Administration Act 1953 – section 255-1 - Schedule 1 of Division 284 – section 284-20 – section 284-75(1) – section 284-80 – section 284-85 – section 284-90(1) - section 284-220 – section 284-225 – section 298-20(1)
Income Tax Assessment Act 1997 – section 995-1(1)
Income Tax Assessment Act 1936 – Part VII
CASES
Shawinigan Ltd V Vokins & Co Ltd (1961) 3 All ER 396
Reed (Albert E) & Co Ltd v London & Rochester Trading Co Ltd (1954) 2 Lloyds Rep 463
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation 2001 ATC 4111
Hart v Federal Commissioner of Taxation 2003 ATC 4665
Case 10/2005, 2005 ATC 197
Brown v Federal Commissioner of Taxation 2006 ATC 2753
Dixon as trustee for the Dixon Holdsworth Superannuation Fund v Federal Commissioner of Taxation 2008 ATC 20-015
Re Hutson and Federal Commissioner of Taxation [2009] AATA 574
Federal Commissioner of Taxation v Burness (as trustee for property of Robert Bottazzi, a bankrupt) 2009 ATC 20-135
Leighton (as trustee of the Leighton Family Trust) v Federal Commissioner of Taxation 2010 ATC 20-215REASONS FOR DECISION
9 November 2011 Senior Member C Walsh Introduction
1.Mr Craddon claimed an input tax credit of $73,000 in his business activity statement (BAS) for the tax period from 1 July 2009 to 30 September 2009 for goods and services tax (GST) payable on the purchase price (of $732,000) for two commercial strata lots in Canning Vale that he had agreed to purchase from a syndicate of companies. Due to Mr Craddon’s default, the contract was terminated before the purchase price was paid. The sale was never completed.
2.On 31 August 2010 the Commissioner issued Mr Craddon with a “Notice of assessment and liability to pay penalty” for the amount of $36,500 in respect of the tax shortfall in his BAS for the period ending September 2009. The stated reason for the penalty was “recklessness”. The penalty of $36,500 represented 50% of the tax shortfall amount of $73,000 (being the input tax credit incorrectly claimed).
3.On 15 September 2010 wrote to the Commissioner stating:
“I remorsefully apologise for action and behaviour over this matter.
I cannot possibly afford to pay this penalty and beg for forgiveness to have a remission of the penalty.
…………
Please accept my plea.”4.Mr Craddon’s letter of 15 September 2010 was treated by the Commissioner as a Notice of Objection. On 11 February 2011 the Commissioner disallowed Mr Craddon’s objection.
5.On 12 April 2011 Mr Craddon applied to the Tribunal for a review of the Commissioner’s objection decision dated 11 February 2011. Mr Craddon’s “Reasons for Application” were listed as follows:
“1. Penalty is too excessive.
2. Apart from initial claim I never pursued the matter.”
6.It is common ground between the parties that Mr Craddon has always accounted for GST on a “cash” (and not an “accruals”) basis. It follows that Mr Craddon was not entitled to attribute any input tax credit in respect of the purchase price payable under the contract of sale in the tax period 1 July 2009 to 20 September 2009 as no part of the purchase price of $732,000 (apart from the deposit of $73,000) had been paid by Mr Craddon on or before 30 September 2009: refer to section 29-10(2) of the A New Tax System (Goods and Services) Tax Act 1999 (GST Act). Further, in Mr Craddon’s case there was no “taxable supply” (as defined in section 9-5 of the GST Act) for GST purposes as the sale was never completed and the consideration for the supply remained unpaid.
7.It is also common ground that at the time Mr Craddon claimed the relevant input tax credit in his BAS for the period ending September 2009 he believed that he was not entitled to it at law.
8.Consequently, the critical issue for determination by the Tribunal in this application is whether the Commissioner’s decision to impose a tax shortfall penalty on Mr Craddon for the amount of $36,500 for “recklessness” was the correct and preferable decision and, then, whether the Commissioner should exercise his discretion to remit all or part of the penalty imposed.
1. Was the Commissioner’s Decision to Impose a Tax Shortfall Penalty on Mr Craddon for the Amount of $36,500 for “Recklessness” the Correct and Preferable One?
Relevant Law on Tax Shortfall Penalty
9.A uniform administrative penalty regime, applicable to all “taxation laws” (which expression is defined in section 995-1(1) of the Income Tax Assessment Act 1997 to include the GST Act), is contained in Part 4-25 of Schedule 1 of the Taxation Administration Act 1953 (TAA).
10.The regime provides that an entity is liable to a penalty if, amongst other things, it makes “statement” to the Commissioner that is “false or misleading in a material particular” resulting in a “shortfall amount” that results from not taking reasonable care to comply with the law, “recklessness” as to the operation of the law or intentional disregard of the law: sections 284-75(1) and 284-90(1) of the TAA.
11.A “statement” for the purposes of Division 284 of the TAA is broadly anything disclosed for a purpose connected with a taxation law: section 284-20 of the TAA.
12.In relation to what is meant by “false or misleading in a material particular”, as it appears in section 284-75 of the TAA (Penalty for false or misleading statement), the Explanatory Memorandum that accompanied the introduction of Division 284 of the TAA (including section 284-75 of the TAA) relevantly provides:
“A statement is false or misleading in a material particular when something in the statement is false or misleading, or something is omitted from the statement. If something is included in, or left out of, a statement relating to a tax matter which, if known, would cause a taxation officer to determine a claim in another way, it will be a material particular. In short, if a matter is important enough to affect a decision relevant to determining the taxpayer’s tax liability, the matter is to be regarded as material and must be disclosed correctly.
A taxpayer who states the wrong industry code in an income tax return will not be regarded as making a false or misleading statement in a material particular, as an incorrect code will generally not affect the taxpayer’s tax liability. Similarly, small or insignificant income omissions will be regarded as immaterial if there is little or no effect on the tax liability and the omission was caused by an honest oversight.”
13.Practice Statement PS LA 2006/2 explains how the penalty regime for false and misleading statements is administered by the Commissioner. Broadly, PS LA 2006/2 provides that a statement is considered by the Commissioner as being “false” if it is contrary to fact or wrong irrespective of whether or not it was made with knowledge that it was false and a statement is “misleading” if it creates a false impression, even if the statement is true. According to the Commissioner, a statement may be “false or misleading” because of something contained in the statement, or because something is omitted from the statement. Even if it is literally true, it may be misleading because it is uninformative, unclear or deceptive.
14.The “shortfall amount” is generally the amount by which the entity’s “tax-related liability” (as defined in section 255-1 of the TAA) based on the statement is less than it would otherwise have been. However, the “shortfall amount” can also be, as is the case presently, the amount by which a payment or credit by the Commissioner to the entity based on the statement exceeds what it would otherwise have been if the statement were not false or misleading: items 1 and 2 of section 284-80 of the TAA. That is, the shortfall amount must have arisen “as a result of” the relevant false or misleading statement: see Brown v Federal Commissioner of Taxation 2006 ATC 2753.
15.If an entity is liable under section 284-75(1) of the TAA for having made a statement that is false or misleading in a material particular, then under section 298-30(1) the Commissioner must make an assessment of the amount of penalty. There are two stages in the assessment of the penalty: (i) calculating the “base penalty amount”; and (ii) increasing or reducing the base penalty amount if certain conditions are satisfied: section 284-85 of the TAA.
16.The “base penalty amounts”, set out in section 284-90 of the TAA, are formulated as percentages of the “shortfall amount”. Broadly, the percentage will depend on the level of care taken by the entity (or agent) which resulted in the shortfall amount. The relevant levels of care are: (i) failure to take reasonable care (item 3 of section 284-90 of the TAA); (ii) recklessness (item 2 of section 284-90 of the TAA); and (iii) intentional disregard (item 1 of section 284-90 of the TAA).
17.In the case of Mr Craddon, the Commissioner imposed a tax shortfall penalty based on a finding that Mr Craddon had been “reckless” in making a statement to the Commissioner that was false and misleading in a material particular: item 2 of section 284-90 of the TAA.
18.Where all or part of an entity’s shortfall amount resulted from “recklessness” by the entity or its tax agent as to the operation of a taxation law (including the GST Act), the base penalty amount is 50% of the shortfall amount or the relevant part of the shortfall amount: item 2 of section 284-90(1) of the TAA.
19.The Explanatory Memorandum associated with the introduction of Division 284 of the TAA states that a taxpayer would be behaving “recklessly” if the taxpayer’s conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person and that a finding of dishonesty is not necessary for a taxpayer to be subject to administrative penalty for reckless behaviour.
20.The Explanatory Memorandum also provides that the concept of “recklessness” for the purposes of this penalty covers behaviour that could be described as “gross negligence” and offers the following example:
“For example, a taxpayer who purchases shares in a company, but makes no attempt to find out the tax consequences of receiving dividends, and who destroys letters from the company (after banking the dividend cheque) without reading them would be penalised 50% of any shortfall amount which results from the taxpayer failing to return the dividends as income.”
21.The meaning of “recklessly” was considered by Megaw J in Shawinigan Ltd v Vokins & Co Ltd (1961) 3 All ER 396 at 403 as meaning:
“…grossly careless. Recklessness is gross carelessness – the doing of something which in fact involves a risk, whether the doer realises it or not; and the risk being such having regard to all the circumstances, that the taking of that risk would be described as ‘reckless’.”
22.Further, in Reed (Albert E) & Co Ltd v London &Rochester Trading Co Ltd (1954) 2 Lloyds Rep 463 Devlin J said (at 465) that the term “recklessly” does not really give rise to much difficulty – it means something more than mere negligence or inadvertence and means deliberately running an unjustifiable risk.
23.In Miscellaneous Taxation Ruling MT 2008/1 the Commissioner sets out his views on the meaning of “recklessness”. In short, MT 2008/1 makes substantially the same points as the Explanatory Memorandum to Division 284 of the TAA as discussed above. According to the Commissioner, “recklessness” is essentially an objective test, and the actual intention of the entity is of no relevance. Although the test is the same as that applied for testing for want of reasonable care, it is the extent or degree to which the conduct of the taxpayer falls below that required of a reasonable person that underscores a finding of “recklessness”. “Recklessness” assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person.
24.The Commissioner’s views on what is meant by “recklessness” are further considered in paragraphs 102 to 107 of PS LA 2006/2. In particular, in paragraph 104 of PS LA 2006/2 the Commissioner refers to the decision of Cooper J in BRK (Bris) Pty Ltd v Federal Commissioner of Taxation 2001 ATC 4111. In that case, Cooper J observed (at 4129), in the context of the old income tax penalty provisions in Part VII of the Income Tax Assessment Act 1936 (ITAA 1936), that “recklessness” means:
“…..to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the ITAA 1936 and regulations may not operate correctly to lead the assessment of the proper tax payable because of the context of the statement.”
See also Hart v Federal Commissioner of Taxation 2003 ATC 4665.
25.Where there is a shortfall amount and part or all of it is caused by “intentional disregard” of a taxation law (which includes the GST Act) by the taxpayer (or a registered agent), the taxpayer is liable to a base penalty amount of 75% of the amount of the shortfall, or part of the shortfall, as relevant: item 1 of section 284-90 of the TAA.
26.Briefly, culpable behaviour falling within this category would include the exclusion of an amount from assessable income, knowing it to be assessable, or the claiming of a deduction, rebate, credit or off-set, knowing that it was not allowable.
27.“Intentional disregard” of the law was found by the Tribunal to have occurred in Case 10/2005, 2005 ATC 197. In that case, the Tribunal found that penalties were correctly imposed for “intentional disregard” in circumstances where a director of a company (who was also a tax agent) lodged 14 BASs claiming GST input tax credits to which the company was not entitled: Case 10/2005 2005 ATC 197.
28.In MT 2008/1, the Commissioner expresses the view that “intentional disregard” requires actual knowledge that a statement is false. According to the Commissioner, evidence of intention may be found through direct evidence or by inference from all the surrounding circumstances, including the taxpayer’s conduct.
29.As noted above, the “base penalty amount” may then be adjusted up or down, depending on a range of factors, such as whether the taxpayer made a voluntary disclosure (in this case, the base penalty amount may be decreased by 80% or 20%), or hindered or obstructed the Commissioner in finding out about the false or misleading statement (in this case, the base penalty amount may be increased by 20%).
30.In the case of Mr Craddon, no decreasing or increasing adjustment was made to the “base penalty amount” for “recklessness”, being of 50% of the shortfall amount (i.e. $36,500, representing 50% of $73,000).
Relevant Facts and Evidence
31.By a standard REIWA “Contract for Sale of Land or Strata Title by Offer and Acceptance”, dated 30 July 2007, Mr Craddon agreed to purchase proposed commercial strata lots 11 and 12 on lot 236 Hurley St, Canning Vale from a syndicate comprising Balmoral Land Holdings Pty Ltd, Calm Bay Investments Pty Ltd, and Warrigal Developments Pty Ltd (Vendors) for $732,000 (Purchase Price) plus GST (Contract of Sale). The Contract of Sale, amongst other things:
· incorporated REIWA Joint Form of General Conditions for the Sale of Land;
· was not subject to finance;
· provided that Mr Craddon was to pay a deposit of $73,000 (Deposit) within ten days of acceptance which was to be held by Professional Settlement Services (the Vendors’ settlement agent), as stakeholder, until settlement; and
· stated that settlement was to be “on or before 30 days from issue of Title”.
32.On 2 August 2007 the applicant lodged a BAS with the Commissioner for the tax period from 1 April 2007 to 30 June 2007. In that BAS, Mr Craddon did not claim an input tax credit in respect of the Purchase Price of the proposed commercial strata lots under the Contract of Sale. None of the BASs lodged by Mr Craddon for the tax periods succeeding that tax period, but preceding the tax period from 1 July 2009 to 30 September 2009, included a claim for an input tax credit in respect of the Purchase Price of the lots.
33.By an “Agreement to Vary Settlement Date” dated 22 May 2008 Mr Craddon and the Vendors agreed that the Contract of Sale be varied by the insertion of the following special conditions:
“6.The Seller and the Buyer agree in accordance with Section 70(4) of the Strata Titles Act that the Strata Plan may be registered twenty (20) months after the Seller accepts the Buyer’s offer and if the Strata Plan is not registered within that period either the Seller or the Buyer may at any time twenty two (22) months after the Seller accepts the Buyer’s offer and before the Strata Plan is registered terminate this Contract by giving Notice in writing advising that this Contract is terminated and upon repayment of the Deposit to the Buyer there shall be no further claim under this Contract by either party against the other at law or in equity or pursuant to statute whether state, federal or otherwise.
7.Final Measurements
The Purchase Price shown on the Contract of $732,000 has been calculated by the square metre area on the draft strata plan multiplied by the rate of $2,480 plus GST per square metre including mezzanine. Measurements on the final Strata Plan registered at Landgate may result in a variation to the measurements shown on the draft strata plan forming part of the Contract. The sale price at settlement will be calculated on the square metre area shown on the final Strata Plan registered at Landgate. The rate per square rate above will be used for the purpose of calculating the actual settlement Purchase Price.”
34.By an undated variation agreement signed by the Vendors and Mr Craddon (and received by the Vendor’s settlement agents, Professional Settlement Services, on 12 August 2009) it was agreed that the settlement day for the Contract of Sale would be altered to 31 August 2009 (Variation Agreement).
35.Mr Craddon failed to complete the Contract of Sale on 31 August 2009 in accordance with the Variation Agreement.
36.On 23 September 2009 the Vendors issued Mr Craddon with a “Default Notice” pursuant to the Contract of Sale (Default Notice). According to that Default Notice:
“C.By letter dated 7 July 2009 from the Seller’s settlement agent Professional Settlement Services to the Buyer the final purchase price was calculated to be seven hundred and forty eight thousand, nine hundred and sixty dollars ($748,960.00) plus GST.
…………
E.The Seller has been ready, willing and able to settle from 6 August 2009.”
34.In addition, the Default Notice provided that unless the default was remedied by Mr Craddon by 8 October 2009, by the tender of a bank cheque for $737,352.21 payable to the Vendors, plus interest, the Vendors would be “entitled to terminate [the] Contract and forfeit the deposit or alternatively elect to seek specific performance of the Contract….”.
35.Mr Craddon prepared a BAS for the tax period 1 July 2009 to 30 September 2009. That BAS included a statement that Mr Craddon had made “Capital purchases” of $730,000 and that he was entitled to “GST on purchases” in the amount of $73,000. As the BAS disclosed no sales or other acquisitions, the resulting refund amount claimed by Mr Craddon in his BAS for the period ending 30 September 2009 $73,000. That BAS was received by the Commissioner on 2 November 2009.
36.Mr Craddon did not hold or provide the Commissioner with a “tax invoice” for the purchase price payable under the Contract of Sale at any time prior to lodging his BAS for the tax period 1 July 2009 to 30 September 2009 with the Commissioner as required by section 29-10(3) of the GST Act.
37.Mr Craddon did not seek any professional advice or make any inquiries with the Commissioner as to whether he was entitled to claim the relevant input tax credit before lodging the abovementioned BAS.
38.On 2 November 2009 a credit of $73,000 was posted to Mr Craddon’s Running Balance Account (RBA) with the Australian Taxation Office (ATO) as a result of which Mr Craddon’s RBA was in credit for $73,335.87. However, that amount was never actually refunded to Mr Craddon by the ATO.
39.On 16 November 2009 Mr Craddon had a telephone conversation with a Case Officer of the ATO who advised him that his BAS, lodged on 2 November 2009, had been selected for a specific refund audit and that the refund claimed in his BAS for the relevant period was being held until the review was completed. The ATO Case Officer advised Mr Craddon that the audit process involved:
· gaining an understanding of the applicant’s business, including the accounting or bookkeeping system used;
· the reason for the refund; and
· obtaining documentary evidence to support the amounts stated in the BAS.
40.The ATO Case Officer also explained to Mr Craddon (on 16 November 2009) that:
· an administrative penalty could apply if the BAS contained incorrect statements;
· if the applicant was aware of any errors in the BAS that it was in his best interests to advise her immediately because any penalty that might otherwise have been imposed resulting from such errors would be reduced; and
· that the applicant was being offered the opportunity to review his records and that if any errors were voluntarily disclosed there may still be a reduction in the penalty that might otherwise have been imposed.
41.Further, on 16 November 2009 the ATO Case Officer asked Mr Craddon to provide the following information and documentary evidence:
· the purchase price pursuant to the contract of sale;
· a vendor issued tax invoice(s) in relation to that amount;
· bank statements proving payment of the invoice(s); and
· relevant pages of the contract of sale including the front page, any clauses relating to GST and the signature page.
42.The ATO Case Officer advised Mr Craddon (on 16 November 2009) that she expected him to supply the requested material within two working days but that she was prepared to negotiate an extension of time if he requested it.
43.On that occasion, Mr Craddon informed the ATO officer that he was a commercial property operator and that he had acquired two commercial properties. However, Mr Craddon did not reveal to the ATO Case Officer that the he had not paid the Purchase Price under the Contract of Sale to the Vendors.
44.Not having received any correspondence from Mr Craddon in response to the above request, the ATO officer telephoned Mr Craddon on 2 December and 9 December 2009 respectively. On both occasions messages were left on Mr Craddon’s answering machine. Mr Craddon did not respond to the messages.
45.On 14 December 2009 the ATO wrote to Mr Craddon (at the address stated on his BAS) again requesting that he provide the previously requested information and documents to the Commissioner by 22 December 2009. Mr Craddon did not respond to that request. Accordingly, the ATO telephoned Mr Craddon on 23 December and 24 December 2009 respectively. On each occasion messages were left on Mr Craddon’s answering machine. Mr Craddon did not respond to those messages.
46.On 23 December 2009, the Vendor’s settlement agents, Professional Settlement Services, released the Deposit Mr Craddon had paid pursuant to the Contract of Sale to the Vendors for the reason that Mr Craddon had failed to complete that contract.
47.On 11 June 2010 another ATO officer explained to Fisher Johnstone, Chartered Accountants (Fisher Johnstone), Mr Craddon’s tax agent, that the ATO was auditing Mr Craddon’s BAS for the tax period 1 July 2009 to 30 September 2009 and that the focus of the audit was the substantiation of the input tax credit claimed in that BAS. Under cover of a letter (of even date), the ATO posted a questionnaire titled “Business Profile Questionnaire” to Mr Craddon and Fisher Johnstone.
48.Also on 11 June 2010, Fisher Johnstone faxed a copy of the “Preliminary Settlement Statement” dated 14 July 2009 for the sale of Lots 11 and 12, 236 Hurley Street, Canning Vale (which statement had been prepared by Synergy Settlements and which was addressed to Mr Craddon) to the ATO.
49.On 17 June 2010 an ATO officer rang Synergy Settlements in relation to the Contract of Sale. The ATO Officer was advised by Synergy Settlements that the sale did not proceed as Mr Craddon had defaulted. On the same day, Synergy Settlements emailed to the ATO scanned copies of:
· the Contract of Sale;
· the Default Notice, dated 23 September 2009, issued by the Vendors to Mr Craddon; and
· Mr Craddon’s application to the Western Australian Office of State Revenue, dated 3 April 2010, for “Exemption” from stamp duty “For Cancelled Transaction” in relation to the Contract of Sale.
50.Another attempt was made by the ATO to contact Mr Craddon by telephone on 17 June 2010. A message was again left on Mr Craddon’s answering machine advising him that the ATO had evidence that the Contract of Sale was never completed and that further information regarding Mr Craddon’s BAS, for the tax period 1 July 2009 to 30 September 2009, was required. In addition, the ATO advised Mr Craddon that if it was unable to contact him a decision in relation to his entitlement to the input tax credit claimed would be made by it without further reference to him.
51.On 18 June 2010 Fisher Johnstone telephoned the ATO advising it that Mr Craddon had contacted them on 17 June 2010 asking them to revise his claim for an input credit made in his BAS for the tax period 1 July 2009 to 30 September 2009 from $73,000 to nil.
52.On 21 June 2010 the ATO, amongst other things, sent Mr Craddon another “Business profile questionnaire” requesting that he return it completed by 25 June 2010.
53.On 25 June 2010 the Vendor’s solicitors and agents issued Mr Craddon with a “Termination Notice”, formally terminating the Contract of Sale.
54.By 26 August 2010, the ATO had not received the completed “Business profile questionnaire”, as requested by it on 21 June 2010, from Mr Craddon. On 26 August 2010 the Commissioner issued Mr Craddon with a “Notice of Assessment of GST net amount” for the period 1 July 2009 to 30 September 2009. Pursuant to this assessment Mr Craddon’s GST net amount was adjusted from $73,000 to $0, effectively disallowing the input tax credit of $73,000 claimed by Mr Craddon in his BAS for the relevant period.
55.On 31 August 2010 a “Notice of assessment and liability to pay penalty” was issued to Mr Craddon for the amount of $36,500. The penalty amount represents 50% of Mr Craddon’s tax shortfall of $73,000 and was based on Mr Craddon having made a statement that was “false or misleading in a material particular” that was caused by his “recklessness”.
56.As stated above, in a letter to the ATO dated 15 September 2010, Mr Craddon said that he “remorsefully apologise[d] for [his] action and behaviour over this matter” and “[could] not possibly afford to pay [the] penalty and beg[s] for forgiveness [and] to have a remission of the penalty”.
57.By letter dated 2 November 2010, the Commissioner acknowledged Mr Craddon’s letter of 15 September 2010 as an objection and requested from him the information initially requested on 16 November 2009 (but never received), plus any other relevant information.
58.Mr Craddon responded to the Commissioner’s letter of 2 November 2010 in an undated letter under cover of which he enclosed copies of extracts from the Contract of Sale and the vendor’s “Termination Notice” dated 25 June 2010. In that letter, Mr Craddon said that he did not ‘currently’ have the funds to pay the penalty without selling his home and that he had lost the $73,000 deposit he made pursuant to the Contract of Sale because he was unable to obtain finance “due to global financial climate and reluctance of lenders to valuate properties”.
59.On 11 January 2011, the Commissioner advised Mr Craddon that his letter of 15 September 2010 and his subsequent undated letter were not objections for the purposes of section 14ZU of the Taxation Administration Act 1953 (“TAA”) as they did not state any grounds and that if he wanted to object to the assessment of penalty he should advise the Commissioner by 24 January 2011.
60.By fax dated 27 January 2011, Fisher Johnstone (Mr Craddon’s tax agent) requested that Mr Craddon’s tax shortfall penalty be remitted because of, inter alia:
“The developer/vendor placed extreme pressure on Mr Craddon to lodge the BAS Return to receive the GST refund in order that he be able to repay the money an advised him that it was standard practice in the property development industry.
As Mr Craddon was inexperienced in these areas of taxation and trusted the developer/vendor not to mislead him and also considering the extreme and constant pressure he exerted by the developer/vendor Mr Craddon proceeded to lodge the BAS Return.
……………..
As noted above, the error arose from a lack of understanding of a relatively complex area of taxation law rather than any intentional or reckless attempt by Mr Craddon to make an invalid claim.
………………
Considering the circumstances and the extreme financial hardship the maintenance of the penalty will place on Mr Craddon we request in this instance that the penalty be remitted.”
61.On 11 February 2011, the Commissioner once again acknowledged Mr Craddon’s letter of 15 September 2010 as an objection and disallowed it in full.
62.As at 11 April 2011 the balance of M Craddon’s RBA was $38,369.02 consisting of the tax shortfall penalty of $36,500.00 and General Interest Charge. On that date, Mr Craddon paid an amount of $38,600.00 to the respondent in respect of that debt.
63.In support of his “Application for Review of Decision” to the Tribunal, Mr Craddon provided a Statement of Facts Issues and Contentions” which stated the following:
“
1. BAS statement for Oct 2009 was completed by myself – under the pressure and influence of a director of the development co. selling 2 commercial units in Canning Vale, Perth.
2. Mark Fisher letter to the Australian Tax Office of [27 January 2011] should have been suffice to settle the matter.
3. The fact that I have paid the penalty only because I have taken out a mortgage on my home.
4. The assumption made by taxation official can hardly be just cause for a fact. Item 63 [of Commissioner’s Statement of Facts Issues and Contentions].”
64.A summary of Mr Craddon’s evidence before the Tribunal is as follows:
·Mr Craddon told the Tribunal that he had had a conversation with a person who was a director of one of the Vendors on or about 1 November 2009 (before lodging his BAS for the tax period ended 30 September 2009). During the course of that conversation, that person had suggested to Mr Craddon that he could raise sufficient funds to enable him to complete the Contract of Sale by lodging a BAS in which was claimed an input tax credit in respect of the full Purchase Price under the Contract of Sale. According to Mr Craddon, that person told Mr Craddon that he had successfully done that before.
·Mr Craddon confirmed for the Tribunal that he has always accounted for GST on a “cash” (and not an “accruals”) basis.
·Mr Craddon confirmed for the Tribunal that he had received the various telephone messages and letters from the Commissioner requesting documents and information relevant to his September 2009 BAS during the period ending in about December 2009 but that he had not responded to those messages and letters.
·Mr Craddon advised the Tribunal that he recalled being asked by an ATO officer for proof of payment in relation to the Purchase Price Payable by him under the Contract of Sale. He acknowledged that he understood that the ATO officer wanted proof of a GST “tax invoice” relating to the Contract of Sale. Mr Craddon admitted that, on that occasion, he did not disclose to the ATO officer that he had not yet paid the Purchase Price under the Contract of Sale (and that he had only paid the Deposit of $73,000).
·Mr Craddon verified that he had never sought professional advice or advice from the ATO in relation to the preparation of his September 2009 BAS.
·Mr Craddon confirmed that he has lodged most BASs late, although generally only by a few days and that he had not yet lodged a BAS for the period ended June 2008. Further, Mr Craddon agreed that his income tax returns for the years ended 30 June 2005, 2006, 2007 and 2008 (which had all been prepared and lodged by his accountant) had all been lodged late (ranging from 21 days late to 411 days late).
·Mr Craddon acknowledged that in the past ten years he had bought and sold commercial properties and that he was aware of the related BAS requirements.
·Mr Craddon informed the Tribunal that he realised at the time of claiming the input tax credit of $73,000 in his BAS, for the tax period ended 30 September 2009, he was making an error. That is, he believed, at that time, that he wasn’t properly entitled to claim the input tax credit concerned. According to Mr Craddon, his only dispute with the Commissioner was with amount of the tax shortfall penalty which had been imposed on him. Mr Craddon contended that the penalty imposed was far too severe and that the only reason he had been able to afford to pay it was that he had mortgaged his own house.
·Mr Craddon told the Tribunal that he currently owns two properties (with a combined value of approximately $900,000) and that was currently trying to raise funds to purchase another property.
Analysis on Tax Shortfall Penalty
65.Since Mr Craddon was at all material times accounting for GST on a “cash (not an “accruals”) basis, he was not entitled to attribute any input tax credit (pursuant to section 29-10(2) of the GST Act) in respect of the Purchase Price payable under the Contract of Sale in the tax period 1 July 2009 to 30 September 2009. The reason for this is that no part of the Purchase Price, apart from the Deposit (of $73,000), had been paid by Mr Craddon on or before 30 September 2009. In addition, as the “supply” of the commercial lots was cancelled before it was made and the consideration for the supply (i.e. the Purchase Price) remained unpaid, there was no “taxable supply” (as defined in section 9-5 of the GST Act) for GST purposes such that there no input tax credit entitlement on the part of Mr Craddon under the GST Act. In addition, Mr Craddon did not hold a valid “tax invoice” as required by section 29-10(3) of the GST Act.
66.The Tribunal considers that as a result of lodging a BAS for the tax period 1 July 2009 to 30 September 2009 containing an incorrect claim for an input tax credit refund (in the amount of $73,000) in relation to the Purchase Price payable by Mr Craddon under the Contract of Sale, the Commissioner was correct in finding that Mr Craddon made a “statement” to the Commissioner that was “false or misleading in a material particular” for the purposes of section 284-75 of Schedule 1 of the TAA.
67.That is, Mr Craddon’s claim for an input tax credit (for $73,000) in his BAS for the period 1 July 2009 to 30 September 2009 constituted a false or misleading statement since the input tax credit was not properly allowable under the GST Act and the BAS contained no additional information which would have allowed a reader to ascertain otherwise.
68.As a consequence of that false or misleading statement, Mr Craddon had a “shortfall amount” equal to $73,000 pursuant to section 284-80(1) of Schedule 1 of the TAA. Based on the relevant facts and evidence before the Tribunal (as set out above), the Tribunal agrees with the Commissioner’s decision that the shortfall amount came about (at the least) as a result of “recklessness” on the part of Mr Craddon.
69.That is, in the Tribunal’s view, Mr Craddon’s conduct in claiming a input tax credit in his September 2009 BAS, to which he was not entitled, shows a disregard or an indifference to the consequences of his actions and amounts to “gross negligence” on his part: Explanatory Memorandum to Division 284 of the TAA and MT 2008/1. In lodging a BAS containing an incorrect claim for an input tax credit with the Commissioner Mr Craddon took a risk that was “reckless” and his actions demonstrate “gross carelessness”: Shawinigin applied. That is, by lodging a BAS containing an incorrect claim for an input tax credit with the Commissioner Mr Craddon deliberately ran an unjustifiable risk: Reed (Albert E) applied. Further, the Tribunal considers that Mr Craddon’s behavior was grossly indifferent to whether or not the “statement” he made to the Commissioner (i.e. by improperly claiming an input tax credit in his September 2009 BAS) was true or correct: BRK (Bris) and Hart applied and refer to PS LA 2006/2.
70.The fact that Mr Craddon claims that he was “under the pressure and influence of a director of the development co. selling [the] 2 commercial units in Canning Vale” does not change the fact that his conduct was to the say the very least “reckless” and the Tribunal’s above conclusion. Further, the claims made by Fisher Johnstone, Mr Craddon’s tax agent, to the Commissioner on his behalf that Mr Craddon was “inexperienced in these areas of taxation” and that his “error arose from a lack of understanding of a relatively complex area of taxation law” are at odds with the evidence before the Tribunal. As set out above, Mr Craddon informed the Tribunal that he had bought and sold commercial properties in the past and that he was well aware of his BAS or GST obligations. More importantly, Mr Craddon acknowledged before the Tribunal that he knew he was not entitled to the input tax credit at the time he claimed it in his September 2009 BAS.
71.As noted previously, under section 284-85 the amount of the penalty that a taxpayer who has made a false or misleading statement must pay is equal to the “base penalty amount”, which is equal to the shortfall amount multiplied by a relevant percentage set out in the table in section 284-90(1) of the TAA, plus any increases resulting from the application of section 284-220 of the TAA and less any decreases resulting from the application of section 284-225 of the TAA.
72.In the case of Mr Craddon, no decreasing or increasing adjustment was made to the “base penalty amount” for “recklessness”, being of 50% of the shortfall amount (i.e. $36,500, representing 50% of $73,000). It is clear from the above facts and evidence that no decreasing adjustment could have been made to the “base penalty amount” in Mr Craddon’s circumstances since no voluntary disclosure concerning the improperly claimed input tax credit was ever made by him. However, on the evidence before the Tribunal, the Tribunal considers that it was open to the Commissioner to increase the “base penalty amount” of 50% (for “recklessness”) by a further 20% by reason that Mr Craddon “hindered” the Commissioner from finding out about the improperly claimed input tax credit by failing to respond to is numerous enquiries and due to his failure to disclose the error to the Commissioner within a reasonable time: Leighton (as trustee of the Leighton Family Trust) v Federal Commissioner of Taxation 2010 ATC 20-215.
73.Based on the relevant facts and evidence before the Tribunal, the Tribunal finds that the Commissioner correctly decided that Mr Craddon’s behaviour in claiming an input tax credit refund of $73,000 in his BAS for the period ended 30 September 2009, to which he was not entitled under the GST Act, was “reckless”. Accordingly, the Commissioner’s decision to impose a penalty of $36,500 on Mr Craddon (representing 50% of the shortfall amount of $73,000) was the correct one.
74.Indeed, the Tribunal considers that in the circumstances of Mr Craddon’s case it was open to the Commissioner to find that Mr Craddon’s conduct in knowingly claiming an input tax credit to which he was not entitled amounted to an “intentional disregard” of the GST Act, attracting the higher penalty of 75%: Case 10/2005 applied and refer to MT 2008/1.
2.Should The Commissioner Have Exercised His Discretion to Remit All or Part of the Tax Shortfall Penalty Imposed on Mr Craddon?
Relevant Law on Remission of Penalties
75.The Commissioner has the discretion to remit an administrative penalty in whole or in part: section 298-20 of Schedule 1 of the TAA. The discretion to remit is unconfined, provided it is exercised within the boundaries of the subject matter, scope and purpose of the legislation: Federal Commissioner of Taxation v Burness (as trustee for property of Robert Bottazzi, a bankrupt) 2009 ATC 20-135 and ATO Decision Impact Statement.
76.The relevant question to be determined when exercising the discretion to remit is whether any part of the penalty should be remitted on the basis that the outcome is ‘harsh’, having regard to the particular circumstances of the taxpayer: Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Federal Commissioner of Taxation 2008 ATC 20-015. ‘Special Circumstances’ need not be established, and the mere fact that no harm has been done is not of itself a matter that can be taken into account: Dixon Holdsworth.
77.PS LA 2006/2 sets outs the Commissioner’s views on when the Commissioner should exercise his discretion under section 298-20 of the TAA to remit a penalty, imposed under section 284-75(1) of Schedule 1 of the TAA, in whole or in part.
78.At paragraph 137 of PS LA 2006/2 the Commissioner states that in exercising the discretion to remit regard should be had to the following objectives of the penalty regime:
“
· The purpose of the penalty regime is to encourage entities to take reasonable care in complying with their tax obligations. What is reasonable will depend on the circumstances of each case. However, as a general rule, the larger the item, the greater the level of care required.
· A major objective of the penalty regime is to promote consistent treatment in respect of the rates of penalty imposed. That objective would be compromised if the penalties imposed at the specified rates were remitted without just cause, arbitrarily or as a matter of course. The Commissioner must ensure that the decision to remit in part or full or not to remit at all is made in good faith and is reasonable. All relevant matters and no irrelevant matters must be taken into consideration in making the decision.
· Entities with a good compliance history* should be encouraged to remain compliant by treating them more leniently than entities which do not have a good compliance history. [* A good compliance history is generally one where all lodgement obligations including lodging activity statements and income tax returns have been met, all non-disputed debt has been paid or is the subject of a payment arrangement and there is no recent history of the entity being liable to shortfall penalty].
· An entity without a good compliance history bears a heavier burden of proof in justifying why remission is warranted. A penalty should not be remitted if the only reason given by the entity is that the understatement or over-claim was the result of carelessness, ignorance as to liability to tax or the fault of their agent.
· The discretion to remit penalties should be administered in a fashion which ensures that the objectives of the penalty regime (for example, to effect improvements in future compliance by taxpayers and to provide certainty for those taxpayers) are achieved without causing unintended or unjust results.”
79.According to paragraphs 138 to 158 of PS LA 2006/2, the factors to be considered by the Commissioner when deciding whether or not to remit a penalty (pursuant to section 298-20 of the TAA). Relevant to this application are the following factors:
· The entity’s particular circumstances;
· The entity’s compliance history;
· Timing adjustments; and
· An unjust result.
80.At paragraph 142 of PS LA 2006/2, the Commissioner comments that “where an entity has been more culpable and has behaved recklessly or with intentional disregard it is difficult to envisage a situation where the Commissioner would exercise the discretion to remit. It would be exceptional if the discretion was exercised when an entity had behaved recklessly or with intentional disregard”. That view was endorsed by the Tribunal in Re Hutsonv Federal Commissioner of Taxation (1974) 74 ATR 965 where Senior Member Sweidan said that it will be a rare case in which the discretion of the Commissioner to remit a penalty is exercised where the penalty arises from “recklessness”.
Analysis Regarding Remission of Penalties
81.As stated above, the relevant question to be determined when exercising the discretion to remit is whether any part of the penalty should be remitted on the basis that the outcome is ‘harsh’, having regard to the particular circumstances of the taxpayer: Dixon Holdsworth 2008 ATC 20-015.
Mr Craddon’s Particular Circumstances
82.As noted above, according to the Commissioner’s views as set out in PS LA 2006/2, Mr Craddon’s particular circumstances are relevant in deciding whether or not the discretion to remit his penalty should be exercised.
83.In Mr Craddon’s case it may be argued that the circumstances surrounding his loss of the deposit of $73,000 in relation to the purchase of the land, and the (absolute) size of the penalty – being $36,500 – to the extent that together or in isolation they may have caused the applicant some hardship - are factors that can be taken into account. However, having regard to the following evidence before the Tribunal, the Tribunal considers that the penalty imposes on Mr Craddon, although by some people’s standards may be considered substantial, is no “harsh” in his particular or individual circumstances:
·in the past ten years Mr Craddon has bought and sold both residential and commercial properties. This was substantiated by information obtained by the Commissioner from DOLA/ Landgate. Mr Craddon confirmed for the Tribunal that he has always understood his BAS obligations.
·Mr Craddon currently owns two properties (with a combined value of approximately $900,000) and that he was currently looking into raising funds for the purpose of acquiring another property; and
·Mr Craddon had paid the penalty in full, although he funded this by mortgaging his own home.
84.Further, in Mr Craddon’s case, he was never actually received a refund of $73,000 for the input tax credit claimed in his September 2009. The reason for this it that the Commissioner’s system for detecting and withholding certain large refunds, subject to verification, operated to withhold Mr Craddon’s claim, subject to verification. On this basis, it may be argued that no actual ‘harm’ was done as a result of Mr Craddon’s behaviour and that therefore the discretion available under section 298-20(1) ought to be exercised in his favour. However, as noted above, the mere fact that no ‘harm’ has been done is not of itself a matter that can be taken into account in determining whether a penalty should be remitted: Dixon Holdsworth 2008 ATC 20-015. In this regard, the Full Federal Court in Dixon Holdsworth remarked (at 2008 ATC 20-015 at paras [21] to [23]):
“21.the legislative scheme clearly indicates that the mere fact that no harm has been done is not of itself a matter that can be taken into account. There are two matters that indicate that it is not permissible, in considering the exercise of the discretion to remit a penalty for a false statement, to have regard to the fact that the Commissioner became aware of the falsity before any harm was done.
22.The first is s 284-225, which makes provision for the reduction in the base penalty if a taxpayer voluntarily informs the Commissioner of the existence of the shortfall amount. Section 284-225 provides for a fixed reduction of 20% or 80%. It also provides for reduction to nil in the event of a shortfall amount of less than $1000. In each case, however, the reduction is provided for only if the taxpayer voluntarily tells the Commissioner about the shortfall. On the other hand, the legislative scheme does not make allowance for the possibility that the Commissioner detects a false statement giving rise to a shortfall amount before any harm is done.
23.The second matter is the general interest charge provided for in the legislation. Those provisions are inconsistent with the exercise of a discretion that would interfere with the uniformity of the application of the administrative penalties. Where a taxpayer has had the benefit of a shortfall amount, or the Commissioner is deprived of such an amount, the payment of interest by the Taxpayer compensates the Commissioner for any harm that might have been suffered. That being so, it is clear that, whether or not the Commissioner suffers a financial detriment by reason of the fact that there is a shortfall amount has nothing to do with the imposition of administrative penalties or their remission.”
Mr Craddon’s Compliance History
85.As stated above, according to the Commissioner’s views as set out in PS LA 2006/2, Mr Craddon’s compliance history is relevant to an exercise of the Commissioner’s discretion to remit his penalty.
86.According to the evidence before the Tribunal, Mr Craddon’s lodgment of BASs (with one exception) and income tax returns are currently up to date, he has no significant debt outstanding and he has not been incurred any other tax shortfall penalties.
87.Having said that, the evidence before the Tribunal also revealed that Mr Craddon’s compliance history has been less than exemplary. That is, the evidence before the Tribunal was that Mr Craddon lodged most of his BASs late, although generally only by a few days. Further, at the commencement of the year ended 30 June 2008 Mr Craddon elected to lodge his BAS on an annual basis for that year but to pay his instalments of GST on a quarterly basis. He has yet to lodge an annual BAS for that year.
88.In addition, the evidence before the Tribunal was that Mr Craddon’s income tax return for the year ended 30 June 2005 was lodged 162 days late, his income tax return for the year ended 30 June 2006 was lodged 169 days late, his income tax return for the year ended 30 June 2007 was lodged 411 days late, his income tax return for the year ended 30 June 2008 was lodged 21 days late and he did not lodge an income tax return for the year ended 30 June 2009.
Timing adjustment
89.In PS LA 2006/2, the Commissioner states (at para 143):
“In some cases a shortfall amount may represent an amount of tax deferred rather than an amount of tax permanently avoided. In such cases there may be scope to remit a penalty in whole or in part.”
90.If Mr Craddon had succeeded in incorrectly obtaining an input tax credit from the ATO for claimed amount of $73,000, the input tax credit would have been allowable and properly attributable to the tax period immediately succeeding the period 1 July 2009 to 30 September 2009. The improperly obtained refund would presumably then have been used Mr Craddon to make up the shortfall in finance and thus enable Mr Craddon to complete the Contract of Sale. The completion of the purchase would have then entitled Mr Craddon to the input tax credit claimed (namely $73,000) in that immediately succeeding tax period. The end result of this scenario is would not be a ‘deferral’ of a liability but rather the obtaining of a benefit by Mr Craddon before it was due: cf. the situation discussed in paragraphs 143 to 145 of PS LA 2006/2. However, in the situation where no input tax credit is actually refunded by the Commissioner (as was the case here), no such future benefit would actually arise. Consequently, Mr Craddon’s shortfall amount of $73,000 does not represent an amount of tax deferred within the meaning of PS LA 2006/2 such that there is no scope to remit his penalty in whole or part on this basis.
Unjust result
91.In PS LA 2006/2 the Commissioner identifies the situation where the imposition of a penalty causes an “unjust result” for the taxpayer concerned as being a relevant factor for consideration in deciding whether or not to remit a penalty.
92.Given the evidence before the Tribunal that Mr Craddon has paid the tax shortfall penalty in full (albeit by taking out a mortgage on his home, that he currently owns two properties (with a combined value of approximately $900,000) and that he is looking into obtain finance to obtain another property, the Tribunal takes the view that the penalty imposed on Mr Craddon does not give rise to an “unjust result” for Mr Craddon.
Conclusion Regarding Remission of Penalty
93.The Tribunal considers that none of the evidence before the Tribunal establishes that the outcome of the penalty imposed on Mr Craddon was “harsh”, having regard to his particular circumstances (as detailed above): Dixon Holdsworth 2008 ATC 20-015 applied.
94.Further, based on the evidence before the Tribunal concerning Mr Craddon’s particular circumstances and his compliance history (as set out above) and having decided that there was no amount of tax deferred giving rise to a mere timing adjustment and that the penalty imposed on Mr Craddon did not give rise to an “unjust result” for him, the Tribunal considers that the Commissioner should not have exercised his discretion under section 298-20 of the TAA to remit all or part of the $36,500 tax shortfall penalty imposed on him.
95.In reaching this conclusion, the Tribunal is mindful of its finding that Mr Craddon’s behaviour in claiming an input tax credit refund in his BAS for the period ended 30 September 2009, knowing at that time that he was not properly entitled to it, amounted to, as decided by the Commissioner, “recklessness” as to the operation of a taxation law (and, further, that in the circumstances of Mr Craddon’s case it was open to the Commissioner to find that Mr Craddon’s behaviour amounted to an “intentional disregard” of a taxation law, attracting the higher penalty of 75%): Re Hutson applied and refer to paragraphs 142 and 144 of PS LA 2006/2.
Decision
96.For the above reasons, the Tribunal affirms the decision under review.
I certify that the 96 preceding paragraphs are a true copy of the reasons for the decision herein of Ms C Walsh, Senior Member
Signed: .(sgd) T Freeman..........
AssociateDate/s of Hearing 14 August 2011
Date of Decision 9 November 2011
Representative for the Applicant Mr C Craddon (Self-represented)
Representative for the Respondent Mr R McGrade
Australian Taxation Office
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