PRINT APPLIED TECHNOLOGY PTY LTD And COMMISSIONER OF TAXATION

[2011] AATA 555

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 555

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2010/4592

TAXATION APPEALS DIVISION		)
Re		PRINT APPLIED TECHNOLOGY PTY LTD

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

TribunalDr G. Hughes, Member

Date12 August 2011

PlaceMelbourne

DecisionThe Tribunal affirms the decision under review.

.................[signed]…...............

Member 

TAXATION – Incorrect BAS statement – whether 50 per cent shortfall penalty appropriate on the grounds of "recklessness" – onus borne by the applicant – indifference of applicant and its sole director – sole director responsible for the accuracy of applicant company's BAS

A New Tax System (Goods and Services Tax) Act 1999 s 11-5, s 19-10

Taxation Administration Act 1953 Schedule 1 s 284-75, s 284-85, s 284-90, s 284-220,
s 284-225, s 298-20

BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] 46 ATR 347

Hart v Commissioner of Taxation (2003) 131 FCR 203

Hua-Aus Pty Ltd v Commissioner of Taxation (2010) 184 FCR 430

McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284

Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243

Tenvoc Properties Pty Ltd v Federal Commissioner of Taxation 2006 ATC 2241

REASONS FOR DECISION

12 August 2011 Dr G. Hughes, Member

1.The issue before the Tribunal was whether the respondent had correctly imposed a shortfall penalty on the applicant pursuant to section 284-90 of Schedule 1 of the Taxation Administration Act 1953 (the Act) and, if so, whether the penalty should be remitted in whole or in part.

2.More specifically, the question was whether the respondent had correctly assessed an incorrect statement by the applicant in a Business Activity Statement (BAS) as involving recklessness and therefore subject to the default rate of 50 per cent of the shortfall amount pursuant to item 2 of section 284-90 of the Act. Or whether the respondent should have assessed the penalty at 25 per cent, pursuant to item 3, on the grounds that it demonstrated only a lack of reasonable care. 

3.

It was not contested by the respondent that the applicant was entitled to a reduction of 20 per cent on the applicable penalty pursuant to section

284-225(1) of Schedule 1 of the Act on the basis that the applicant voluntarily disclosed the shortfall in the course of a tax audit.

4.The circumstances in question involved a complex series of transactions in relation to what, on its face, should have been a reasonably straightforward sale of printing equipment:

(a)Frank Todisco (Todisco) was at the relevant time a director of the applicant and a previous director and shareholder of Printlinx Pty Ltd (Printlinx) which was seeking to sell surplus equipment;

(b)the applicant agreed to acquire the assets from Printlinx for $3 million plus GST;

(c)on 27 January 2009 Todisco personally issued a tax invoice to the applicant for the sum of $3.3 million (GST inclusive);

(d)on 10 February 2009 the applicant made a payment of $330,000 to Todisco, representing a 10 per cent deposit;

(e)an independent external valuer subsequently valued the equipment at $1.9 million and, as a consequence, the transaction was cancelled on 31 March 2009;

(f)on the same day, the applicant procured a hire purchase facility from the Bank of Queensland Equipment Finance Limited (BOQ) to purchase the equipment for $1.9 million plus GST (a total of $2.09 million);

(g)Heidelberg Graphic Equipment Limited (Heidelberg) then purchased the equipment for $1.9 million plus GST. On 7 April 2009 Heidelberg on sold the equipment to BOQ, which in turn sold the equipment to the applicant under a commercial hire purchase agreement for $1.9 million plus GST. 

5.On 5 May 2009 the applicant lodged its BAS for the tax period ending 31 March 2009, indicating that it had purchased the equipment from its director, Todisco, for $3.3 million and claiming an input tax credit of $300,000. 

6.On 25 August 2009 the respondent arranged for an audit of the applicant in respect of the period from 1 April 2008 to 31 March 2009 and, in the process, requested details of the capital acquisitions totalling $3.3 million in the period from 1 January to 31 March 2009. 

7.The audit concluded that:

(a)the applicant provided a tax invoice issued by Todisco dated 27 January 2009 to support the transaction;

(b)the applicant's tax agent provided a voluntary disclosure to the effect that Todisco, not Printlinx, had issued the invoice in order to secure finance for the purchase, such finance later being rejected;

(c)when the transaction was cancelled, the deposit of $330,000 was reversed and journalised as a loan to Todisco;

(d)neither Printlinx nor Todisco recorded the transaction of $3.3 million in their accounts for the quarter in question;

(e)the transaction had not proceeded; and

(f)Heidelberg ultimately purchased the equipment for $1.9 million plus GST from Printlinx and then on sold it to the applicant for $1.9 million plus GST.

8.The auditor determined that the applicant had acted recklessly because it had claimed input tax credits on a tax invoice that Todisco issued in respect of a transaction stated to be valued at $3 million plus GST, when in fact the value of the transaction was $1.9 million plus GST.  On 26 March 2009, Todisco had issued a credit note for the amount of $3.3 million to offset the transaction.  The deposit of $330,000 paid by Todisco had been reversed and journalised as a loan to Todisco.  Neither the credit note of $3.3 million nor the purchase of the equipment for $2.09 million had been recorded in the applicant's account when it lodged its BAS for the periods from 1 January 2009 to 31 March 2009 and from 1 April 2009 to 30 June 2009. 

9.The respondent accordingly disallowed the input tax credit claim of $300,000 and imposed a penalty of 50 per cent pursuant to sections 284-85 and 284-90 of Schedule 1 of the Act. The respondent reduced the penalty by 20 per cent pursuant to section 284-225(1) of Schedule 1 of the Act due to the voluntary disclosure by the applicant during the audit.

10.The applicant appealed the decision, principally on the basis that it was incorrect for the respondent to assert that the applicant held the credit note prior to the preparation and lodgement of the BAS.  The applicant claimed it did not hold the credit note until 4 September 2009 and could therefore not include it in any BAS until after that date.  The applicant’s tax agent sent the credit note by email to Rodney Stephens, the applicant’s finance manager, on 4 September 2009. 

11.The applicant further contended that the amount of $330,000 was only journalised as a loan to Todisco after the applicant was made aware of the cancellation of the transaction on 4 September 2009. 

12.The respondent disputed the applicant's contention, noting that an external valuer had downgraded the value of the equipment prior to 31 March 2009. BOQ had approved funding of $2.09 million on 31 March 2009 and Todisco was noted on the BOQ approval form as a guarantor.  The equipment had been purchased for $2.09 million (including GST) on 7 April 2009, nearly a month before the applicant lodged its BAS on 5 May 2009. 

13.The respondent drew the Tribunal's attention to an exchange of emails in April 2009 which are, in the Tribunal's opinion, of considerable significance:

(a)on 23 April 2009, Rodney Stephens emailed Bob Skraba, with a  ‘cc’ to Todisco.   Skraba was the applicant's accountant (albeit with a printlinx email address).  The email stated:

Attached are figures I have prepared for March BAS return.  Included are two sets:

0309 including $3,300,000 for Second hand Speedmasters

0309a excluding $3,300,000 for Second hand Speedmasters

Can you confirm which set of figures we will be using in our March BAS return;

(b)Skraba’s reply on the same day stated:

According to Frank Todisco's instructions, you should use 0309 (including $3,300,000 for the Speedmasters) which will result in a refund to PAT of $233,416.

14.Todisco does not appear to have been provided with a copy of Skraba's reply.  Todisco told the Tribunal that he had no recollection of providing any such instructions to Skraba.  Neither Stephens nor Skraba were called to give evidence, however.

RELEVANT LEGISLATION

15.Section 284-75(1) of Schedule 1 of the Act provided, at the relevant time:

You are liable to an administrative penalty if:

(a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law; and

(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and

(c)       you have a shortfall amount as a result of the statement.

16.

Section 284-85(1) of Schedule 1 provides that the base penalty amount on a GST shortfall is to be determined by reference to the table in section 284-90, unless it is to be increased under section 284-220 or reduced under

section 284-225. 

17.Item 2 in the table in section 284-90 of Schedule 1 provides that the base penalty amount for recklessness is 50 per cent of the shortfall amount.  Item 3 provides that the base penalty amount is 25 per cent in the case of a failure to take reasonable care to comply with the taxation law. 

18.Section 284-225(1) of Schedule 1 provided at the relevant time that the base penalty amount is to be reduced by 20 per cent for an accounting period if:

(a)the Commissioner tells you that a tax audit is to be conducted of your financial affairs for that period or a period that includes that period; and

(b)after that time, you voluntarily tell the Commissioner, in the approved form, about the shortfall or the part of it; and

(c)telling the Commissioner can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the audit. 

19. At the relevant time, section 298-20(1) of Schedule 1 provided simply:

The Commissioner may remit all or a part of the penalty. 

TRIBUNAL'S FINDINGS

20.There is no question that the applicant made a creditable acquisition, as defined in section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), at the time it acquired the equipment. 

21.

There is also no dispute that an adjustment event as defined in section

19-10(1) of the GST Act occurred when the transaction was cancelled.

22.Further, there is no question that the applicant did not properly record the adjustment event in the BAS lodged on 5 May 2009. 

23.In addition, the respondent concedes that the applicant is, pursuant to section 284-225(1) of Schedule 1 of the Act, entitled to a 20 per cent reduction in any assessed penalty in view of the voluntary disclosure by the applicant's tax agent in the course of the audit.

24.The principal issue for the Tribunal, therefore, is whether the penalty imposed by the respondent was excessive.  In short, it is a question of whether the shortfall amount attributable to the inaccurate BAS was the result of recklessness by the applicant or the result of a failure by the applicant to take reasonable care to comply with its legal obligations. A secondary issue is whether the applicant is entitled to a remission pursuant to section 298-20(1) of Schedule 1 of the Act.

25.Recklessness was defined by Cooper J in BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] 46 ATR 347 at 364 [77]:

Recklessness in this context 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 [Act] and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement.  So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness. 

The Federal Court approved this decision in Hart v Commissioner of Taxation (2003) 131 FCR 203 at 214 [43].

26.

Consistent with the above authority, Miscellaneous Taxation Ruling

MT 2008/1 states:

… a finding of recklessness depends on the application of an essentially objective test … Recklessness assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person.

27.In the Tribunal's opinion, indifference is probably the most appropriate characterisation of the behaviour of Todisco and, through him, the applicant. 

28.The taxpayer – in this case, the applicant – bears the onus of proving that an assessment is excessive: see, for example, Hua-Aus Pty Ltd v Commissioner of Taxation (2010) 184 FCR 430; McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284. The applicant has failed, however, to persuade the Tribunal that the respondent's assessment is inappropriate.

29.The Tribunal finds as a matter of fact that, as the respondent contended:

(a)prior to the applicant lodging its BAS, the applicant's sole director, Todisco, knew or should have known that the applicant was not proceeding with the transaction;

(b)despite Todisco's knowledge, he appears to have instructed the applicant to proceed with the input tax credit claim.  If, as Todisco claims, he in fact did not provide such instructions, then he was patently indifferent as to how his professional advisers prepared the input tax credit claim;

(c)by failing to ensure that the BAS excluded the $3.3 million transaction, Todisco, and thus the applicant, knew or should have known there was a real risk the applicant's BAS would not accurately reflect the applicant's position; and

(d)as a consequence, the applicant's conduct in disregarding this significant risk was clearly reckless.

30.The Tribunal rejects the applicant's assertion that the person responsible for preparing the BAS, Rodney Stephens, was unaware that the transaction had not proceeded when he prepared and lodged the BAS.  The exchange of emails between Stephens and Skraba on 23 April 2009 is evidence that Stephens was fully aware, at the time the BAS was prepared on 5 May 2009, that the sale of equipment by Printlinx for $3.3 million had been cancelled. 

31.Todisco cannot plausibly assert that he was unaware of the cancellation of the original transaction, given the fact that he received a copy of Stephens' email of 23 April 2009.  In the circumstances, it is not relevant that he did not receive a copy of Skraba's reply, or that he cannot recall instructing Skraba in relation to the reply.  Even if it was the case that he only received a copy of the original email from Stephens, this should have been sufficient for him to have made further inquiries as to how Skraba proposed to respond.  Ultimately, it must be emphasised, it was Todisco, as the applicant’s sole director, who was responsible for the accuracy of the BAS: Tenvoc Properties Pty Ltd v Federal Commissioner of Taxation 2006 ATC 2241.

32.If there was any other explanation or interpretation of the email exchange between Stephens and Skraba, it was incumbent upon the applicant to call one or both persons as witnesses.  The fact that it did not do so entitles the Tribunal to draw an inference that  their evidence would not have been helpful to the applicant; see, for example, Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243.

33.The email exchange is not the only factor which has influenced the Tribunal in reaching its conclusion.  It is also particularly relevant that Todisco was a guarantor of the BOQ hire purchase facility, and the documentation for this was concluded on or before 31 March 2009.  This again is evidence that Todisco, and hence the applicant, knew or should reasonably have been expected to know that the $3.3 million transaction had been cancelled; and that, as a consequence, it was incorrect for the BAS lodged on the applicant’s behalf to assert otherwise. 

34.It is possible that Todisco placed complete faith in his financial advisers to ensure the accuracy of the BAS.  Even if this was the case, it would not affect the Tribunal's conclusion that the applicant's conduct was reckless.  The applicant, through Todisco, took the risk that his advisers themselves might be reckless: see, for example, BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] 46 ATR 347. However, whether the applicant's financial advisers were reckless is ultimately not to the point, in view of the applicant’s indifference (through Todisco) to ensuring the correctness of information which Todisco knew, by virtue of the email exchange on 23 April 2009, was the subject of deliberation by the applicant's professional advisers.

35.As indicated above, under section 284-75(1) of Schedule 1 to the Act, an administrative penalty can be applied where the taxpayer makes a statement to the Commissioner which is false or misleading in a material particular. There can be no dispute in this instance that the BAS lodged by the applicant on 5 May 2009 was false or misleading in a material respect.

36.The base penalty for any shortfall amount resulting from recklessness by a taxpayer as to the operation of the taxation law is 50 per cent, pursuant to item 2 of section 284-90(1) of the Act. In this instance, the applicant had claimed an input tax credit of $300,000 to which it was not entitled; and the BAS itself constituted a statement which was false and misleading in a material particular. The Tribunal is satisfied that the applicant's conduct was reckless within the meaning of item 2 of section 284-90(1) and that accordingly the penalty of 50 per cent was correctly imposed. This equates to $150,000 which, after applying the 20 per cent reduction conceded by the respondent, results in an ultimate penalty of $120,000.

37.The assessed penalty can be remitted in part or in full at the discretion of the respondent pursuant to section 298-20(1) of Schedule 1 of the Act. However, the applicant has advanced no grounds which would justify a remission, either in whole or in part. Todisco told the Tribunal that application of the penalty to the applicant would cause the applicant considerable financial difficulty and jeopardise the livelihood of its employees. The applicant gave no evidence to support this contention, however, and the Tribunal remains unpersuaded.

38.The respondent emphasised the applicant's poor compliance history, including outstanding debts and a history of late payments.  The Tribunal's finding is not based on this alleged poor compliance history but rather on its assessment of the degree of carelessness, or recklessness, comprised within the single transaction in question. 

DECISION

39.For the above reasons, the Tribunal affirms the decision under review, and upholds the imposition of a base penalty of 50 per cent, less 20 per cent reduction to reflect the voluntary disclosure by the applicant's tax agent in the course of the tax audit in August 2009. The Tribunal finds no grounds for a remission of the penalty.

I certify that the thirty-nine [39] preceding paragraphs are a true copy of the reasons for the decision herein of:
Dr G. Hughes, Member

Signed: ...........................[signed].....................................

Associate  Y. Maker

Date of Hearing  27 July 2011
Date of Decision  12 August 2011
Advocate for the Applicant       Mr F. Todisco
Counsel for the Respondent     Mr N. Evans
Solicitor for the Respondent     Mr D. Spasevski, ATO Legal Services Branch