Petersen and Anor and Commissioner of Taxation

[2008] AATA 199

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 199

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          WT200400089          )          &   )          WT2004000206

TAXATION APPEALS DIVISION		)
Re		CHRISTINE PETERSEN and JOHN LEAKE

Applicants

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr A Sweidan, Senior Member

Date13 March 2008

PlacePerth

Decision The Tribunal affirms the decision under review insofar as it relates to the imposition of additional tax by way of penalty.

...........[sgd Mr A Sweidan].............

Senior Member

CATCHWORDS

Taxation – income tax – imposition of additional tax by way of penalty – deductions claimed under section 8-1 of ITAA 1997 disallowed – whether penalty properly imposed

LEGISLATION

Income Tax Assessment Act 1936 s 226L

CASES

Starr v Commissioner of Taxation; Hopkins v Commissioner of Taxation 2007 ATC 4080; (2007) 65 ATR 86; [2007] FCA 23 at [47] 

Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450 at 477 [108]

Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1 at 26 [108]

REASONS FOR DECISION

13 March 2008 Mr A Sweidan, Senior Member    

1.      The Tribunal handed down Reasons for Decision in the above matters on 26 October, 2007 but reserved it’s decision on the question of penalties.

2. In the case of each applicant, the Commissioner imposed penalty by way of additional tax pursuant to section 226L, alternatively pursuant to section 226 of the Income Tax Assessment Act 1936 at the rate of 50% of the amount of the tax shortfall arising from the deductions claimed in respect of his or her participation in the Banalasta Natural Oil Joint Venture Project No. 1.  In the case of the applicant Leake that penalty was reduced, for voluntary disclosure, to 10% of the tax shortfall in accordance with section 226E of the Act.

3.      The Tribunal has afforded the parties an opportunity to make further submissions in regard to the penalties which were imposed by the Commissioner by way of additional tax and such submissions have been considered by the Tribunal.

4. The Tribunal is of the view that the additional tax is not excessive and that the penalty was properly imposed under section 226L having regard to the following:

4.1As set out in its Reasons for Decision dated 26 October 2007, the Tribunal found that the claimed deductions were not allowable under section 8-1 of the Income Tax Assessment Act 1997;

4.2The Tribunal found that the tax savings projected by the project prospectus were what the outgoings were really incurred for.  In particular, the Tribunal did not accept the applicants’ evidence that they were concerned with making income from the JV Project: As noted in the Tribunal’s Reasons: “…they were in the Tribunal’s view not genuinely concerned with making a return at all.  Their assertions to the contrary are not accepted … particularly when the JV Project structure permitted the applicants’ participation without risk of loss”.

4.3The Tribunal finds that it is not reasonably arguable that the applicants’ treatment of the claimed deductions as allowable under section 8-1 of the 1997 Act was correct.

Application of section 226L of the 1936 Act.

5. Section 226L provides:

Subject to this Part, if:

(a)a taxpayer has a tax shortfall for a year; and

(b)the shortfall or part of it was caused by the taxpayer in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; and

(c)the scheme was a tax avoidance scheme within the meaning of subsection 224(1); and

(d)none of the scheme sections applies in relation to the scheme; the taxpayer is liable to pay, by way of penalty, additional tax equal to:

(e)if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct – 25% of the amount of the shortfall or part; or

(f)in any other case – 50% of the amount of the shortfall or part.

6.      The requirement of paragraph (a) is clearly met. As noted above the Tribunal found that the claimed deductions are not allowable under section 8-1 of the 1997 Act.  Accordingly, each applicant had a tax shortfall in the year ended 30 June, 1999.

7.      The requirements of paragraph (b) are also met.  The shortfall was caused by each applicant, in his or her tax return for the 1999 year, treating section 8-1 as applying to outgoings in relation to the Banalasta Natural Oil Joint Venture Project No. 1 as allowable.  Scheme, as used in paragraph (b) is not defined there.  It takes its meaning from the first part of paragraph (c), (and, ultimately, section 224(2)).  In the Tribunal’s view as set out below, the JV Project is a scheme in the sense used in section 177A of the 1936 Act, that is:

(a)any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b)any scheme, plan, proposal, action, course of action or course of conduct.

8.      As well, the requirements of paragraph (c) are met.  The JV Project was a tax avoidance scheme within the meaning of subsection 224(1).

9.      Section 224(2) relevantly defines tax avoidance scheme. Section 224(2) states:

In subsection (1), “tax avoidance scheme” means a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax.

10.     The initial phrase in section 224(2), scheme within the meaning of Part IVA, refers to the meaning given to scheme in Part IVA, specifically by section 177A.  See Starr v Commissioner of Taxation; Hopkins v Commissioner of Taxation 2007 ATC 4080; (2007) 65 ATR 86; [2007] FCA 23 at [47]. The Tribunal is of the opinion that the JV Project clearly falls within the meaning of scheme so defined.

11.     The second part of the definition requires consideration of the taxpayer’s purpose in entering into or carrying out the scheme: Starr v Commissioner of Taxation; Hopkins v Commissioner of Taxation at [49]-[50]. As noted above, the Tribunal found that the purpose of each applicant was to obtain the tax savings which permitted participation in the JV Project without risk of loss. It follows in the view of the Tribunal, for the purposes of section 226L(c) and in the words of the definition of tax avoidance scheme in section 224(2), that the JV Project was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax.

12.     Finally, the requirements of paragraph (d) are met.  Section 222A(1) defines the scheme sections as section 224, 225, 226 and 226AA of the 1936 Act.  They are those penalty sections which impose penalty by way of additional tax when the Commissioner has applied an anti-avoidance section to, relevantly, disallow a deduction otherwise allowable.  As a result of the Tribunal’s finding that the claimed deductions were not allowable under section 8-1 of the 1997 Act, none of the scheme sections applies.

13.     The Tribunal finds that the Commissioner correctly applied penalty at the rate of 50% of the amount of the tax shortfalls.  In the Tribunal’s opinion it was not reasonably arguable that the deductions claimed were allowable under section 8-1 of the 1997 Act.  The Tribunal found section 8-1 not to be applicable on several bases, i.e.:

13.1the applicants’ claimed deductions were not referable to business activities but specifically referable to research and development activities to be conducted over the first two years of their participation;

13.2each applicant’s claimed deductions were outgoings of capital or of a capital nature.  There is no basis in the project documents for concluding that the applicants were, in any way, in business on their own account; and

13.3the gaining of assessable income was not the advantage that the outgoings sought to achieve.

14.     Accordingly, it cannot objectively be said that, while wrong, the taxpayers’ argument could be argued on rational grounds to be right: see s 222C of the 1936 Act and Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450 at 477 [108]; Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1 at 26 [108].

DECISION

15.     The decision of the Commissioner with regard to additional tax by way of penalty in each case is affirmed.

I certify that the 15 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member

Signed: ................[sgd J Lim].......................
  Associate

Date/s of Hearing  17 and 18 July 2007
Date of final submissions         10 January 2008
Date of Decision  13 March 2008
Counsel for the Applicant         Mr D Romano
Solicitor for the Applicant          Wilson & Atkinson
Counsel for the Respondent     Ms H Symon SC
  Mr J Allanson
Solicitor for the Respondent     Australian Government Solicitor