Re Dixon ATF the Dixon Holdsworth Superannuation Fund and Federal Commissioner of Taxation

[2006] AATA 130

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 130

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No QT2005/222, QT2006/48

TAXATION APPEALS DIVISION		)
Re		MR ARCHIBALD DIXON ATF THE DIXON HOLDSWORTH SUPERANNUATION FUND

Applicant

And COMMISSONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member B J McCabe

Date17 February 2006

PlaceBrisbane

Decision The Commissioner’s decision to impose a penalty at the rate of 50% on the amount of the tax shortfall is affirmed. The decision not to remit the penalty is varied. The Tribunal concludes the penalty should be fixed at 25% of the tax shortfall with the balance of the penalty to be remitted to the taxpayer.

...........[Sgd]..............
  BJ McCabe

SENIOR MEMBER

CATCHWORDS

TAXATION – Goods and Services Tax – claim for input tax credits to which applicant not entitled – purchase of property as a going concern – conduct of applicant amounted to recklessness – remittal of penalty

A New Tax System (Goods and Services Tax) Act 1999 s 38.325

Taxation Administration Act 1953 s 14ZZK, Sch 1 Div 284 s 298-20, 284-75, 284-80, 284-90

Arrow Pearl Co Pty Ltd and Commissioner of Taxation [2005] AATA 340

Hart v Commissioner of Taxation (2003) 131 FCR 203

Hobart Central Child Care Pty Ltd and Commissioner of Taxation [2005] AATA 1027

Jones and Commissioner of Taxation [2003] AATA 84

Otway Pastoral Pty Ltd and Commissioner of Taxation [2005] AATA 649

Reed (Albert E) and Co Ltd v London and Rochester Trading Co Ltd [1954] 2 Lloyds Rep 463

Shawinigan Ltd v Vokins and Co Ltd [1961] 3 All ER 396

The Taxpayer and Commissioner of Taxation [2004] AATA 1304

REASONS FOR DECISION

17 February 2006 Senior Member B J McCabe         

introduction

1.      The applicant purchased a commercial property in 2003 in his capacity as trustee of a superannuation fund. GST was not levied on the sale because the property was fully tenanted and acquired as a going concern. The applicant’s tax agent at the time recognised GST was not payable and completed a Business Activity Statement (BAS) on that basis. The applicant engaged a new tax agent some time later who questioned whether GST had been paid on the sale. An amended BAS was lodged seeking an Input Tax Credit in the amount of $171,491. The parties agree the amended BAS should never have been filed. The Commissioner detected the error before any money was refunded. He imposed an administrative penalty on the basis that the claim was made recklessly. The penalty was levied at 50% of the amount of the credit that had been wrongly claimed. The applicant has asked the Tribunal to review the Commissioner’s decision to impose the penalty, and the separate but related decision not to remit any of the penalty.

2.      The Commissioner’s decision to impose the penalty was correct. The decision not to remit the penalty is varied. I explain my reasons below.

the material before the tribunal

3. The Tribunal was provided with the documents required under s 37 of the Administrative Appeals Tribunal Act 1975 for each application. The following documents were also tendered in evidence and taken into consideration for the purposes of this decision:

·Bundle of documents submitted by the applicant with a cover letter dated 1 February 2006 (exhibit 3);

·Written witness statement of Graeme Gillard and annexures (exhibit 4);

·Two REIQ contracts of sale for commercial land and buildings (exhibits 5 and 6);

·A BAS/GST checklist (exhibit 7);

·Written witness statement of Paul Mugridge (exhibit 8);

·Statutory declaration of Kay Anderson (exhibit 9).

4.      The applicant gave evidence at the hearing. The Tribunal also heard from Messrs Graeme Gillard and Paul Mugridge, the applicant’s tax agents.

5.      The applicant appeared in person. Mr Looney of Counsel represented the respondent.

the facts

6.      Mr Dixon moved to Australia in 2000 from New Zealand following the death of his wife. Mr Dixon had been a successful businessman in New Zealand where he was involved in the construction industry. He told the hearing his late wife had always looked after his tax affairs. Mr Dixon said he decided to retire to the Gold Coast. He had money invested in New Zealand and was living off capital.

7.      The applicant commenced a relationship with Pamela Holdsworth after he came to Australia. They subsequently married. Mr Dixon told the Tribunal he was worried his assets in New Zealand were diminishing at an alarming rate. He decided to adopt a more active investment strategy. He spoke with a friend who was involved in a company that owned a commercial property tenanted by a number of retailers. The applicant and the company, AHC, entered into negotiations to purchase the building. It was intended the building would yield a rental income for the applicant and his wife. He spoke with professional advisers who advised him to establish a superannuation fund and make the purchase through the fund.

8.      The vendor of the property provided several draft contracts during the course of negotiations. In a separate transaction, the applicant made an advance by way of loan to the company to help it meet a short-term cash flow problem. That money was repaid on the eve of the sale of the property and the money was used as part of the purchase price. The applicant and his wife realised other investments and applied all of their funds towards the purchase.

9.      Mr Dixon retained a solicitor in connection with the purchase. The applicant signed a copy of the final version of the contract. The vendor signed a separate copy of the contract. The sale was completed on 31 October 2003 and the purchase price of $1,885,000 was paid. The contract specified the property was sold as a going concern: see exhibit one, at p 34.

10.     The applicant retained Mr Paul Mugridge, a tax agent, to assist him with his tax affairs. Mr Mugridge completed the BAS for the quarter ending 31 December 2003. He did so after completing a BAS check-list which he discussed with his client. A copy of the BAS check-list is annexed to Mr Mugridge’s statement. The check-list confirms the sale was not subject to GST, and that there was no basis for seeking an input tax credit (ITC). It also confirmed there was no need to locate a tax invoice (which is ordinarily required in order to make a claim for an ITC) given GST was not paid on the sale.

11.     The applicant completed the next three BAS’s himself. He said he acquired a computer and software for this purpose. He said these statements were the first occasions on which he had ever dealt with a tax authority: his late wife had handled all the tax affairs in the past. He decided to engage a new tax agent to assist in the latter part of 2004. He said he was under the impression Mr Mugridge was going out of business, so he approached Mr Gillard. Mr Gillard was recommended to him by a friend. The applicant says all of the documents in his possession relating to the property were handed to Mr Gillard. One of the documents was a partial copy of an earlier version of the contract of sale. Mr Gillard also wrote to the applicant’s former tax agent to obtain documents.

12.     Mr Gillard reviewed the documentation he received. He examined the partial copy of the draft contract of sale in particular. He questioned Mr Dixon about why there had not been a claim for an ITC on the purchase of the property. Mr Dixon said he did not know, although he agreed he recollected the previous tax agent had a reason for not making the claim. The applicant said he would approach the vendor to clarify whether GST had been paid.

13.     Mr Dixon says he made several attempts to contact the relevant officer of the vendor to discuss the GST status. He was unsuccessful. Ms Anderson, an employee of Mr Gillard, also made an unsuccessful attempt to contact someone in the vendor’s office. No one thought to contact Mr Mugridge or the applicant’s solicitor. That is surprising: a phone call or letter to either person could have resolved the uncertainty.

14.      The applicant’s tax agent lodged an amended BAS relating to the quarter ending on 31 December 2003 seeking an ITC. The amended BAS was lodged on 8 December 2004. The events surrounding lodgement are in dispute. The applicant insists he did not instruct Mr Gillard or Ms Anderson to lodge the amended BAS. He says he only became aware the BAS was lodged when officers from the Australian Tax Office began contacting him to investigate the claim. Mr Gillard was unable to shed any light on precisely why the BAS was lodged when it was: he agreed in evidence that the document should never have been lodged as his earlier questions over the sale had not been satisfactorily answered.

15.     Mr Dixon recalled a conversation with Mr Gillard in which Mr Gillard said words to the effect:

You can lodge the BAS and claim the ITC. If it turns out to be a mistake, you can always give the money back.

16.     Mr Gillard denies he said any such thing.

17.     Mr Gillard’s statement annexed a file note that was apparently prepared by Ms Anderson. The note purported to record the substance of a telephone conversation between Ms Anderson and the applicant. In that conversation, Ms Anderson apparently discussed the BAS and was advised that all of the figures were in order. The note confirms the applicant said she should proceed to lodge the BAS. Ms Anderson was not available for cross-examination: she had left Mr Gillard’s employ and was travelling in a remote area of Western Australia at the time of the hearing.

18.     Once it became apparent the Commissioner was intent on imposing penalties, the applicant asked Mr Gillard what he proposed. Mr Gillard said he could not pay the penalty himself but suggested Mr Dixon could sue. He also agreed he reached an informal arrangement with Mr Dixon to make amends for the problems by providing free tax services.

19.     Mr Dixon was a poor witness. He did not have a good memory for detail. He could not remember important conversations or documents. He said he had recently seen a doctor because of concerns about the state of his memory. While I do not call into question his honesty, I think his evidence must be treated with caution given the poor standard of his recollection.

20.     I am satisfied the applicant genuinely did not understand why he had not been able to claim an ITC on the transaction – but I am also satisfied he knew Mr Mugridge had considered the question and made a decision. His new tax agent appeared to hold out the prospect of making a claim. I accept Mr Dixon did not understand the way in which the tax system worked. I accept Mr Gillard told him a claim could be made and the money returned if it turned out to be mistaken. I am satisfied the applicant decided to proceed with a claim on that (speculative) basis. While Mr Gillard denies he gave the advice to Mr Dixon to proceed with a claim and return the money in the event the claim was disallowed, it is the only plausible explanation for the decision to proceed to file the BAS in circumstances where the questions Mr Gillard had asked of the applicant had not been answered. I note Mr Gillard was unaware of other aspects of the GST legislation relating to the transaction (eg, the need to approach the Commissioner before the BAS is filed if it is intended to rely on a document that is not a tax invoice). I think he had an imperfect understanding of the consequences of filing a BAS containing errors.

the legislative framework

21. There is no dispute that the claim for an ITC was not open to the applicant in circumstances where the property in question was sold as a going concern: s 38.325 of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act).

22. A taxpayer who includes a statement that is false or misleading in a material particular may become liable to pay an administrative penalty. The penalty regime is provided for in Division 284 of Schedule 1 to the Taxation Administration Act 1953 (the TAA). Section 284-75 says the penalty may be imposed where there is a shortfall amount. A shortfall amount in these circumstances is the amount by which the payment of the credit is more than it would otherwise have been: s 284-80. In this case, the shortfall amount is the amount of the ITC which the applicant claimed, but was not entitled to receive: $171,363.

23. The amount of the penalty is calculated as a percentage of the shortfall amount. The precise percentage will depend in each case on the circumstances in which the shortfall arose. Section 284-90 says the penalty should be levied at a rate of 50% where the shortfall “resulted from recklessness by you or your agent as to the operation of a taxation law”.

was the penalty properly imposed?

24.     The taxpayer is liable to pay the penalty in this case if either he or his agent was reckless. Recklessness is not defined in the TAA, but it is has been discussed in a number of cases. In Reed (Albert E) and Co Ltd v London and Rochester Trading Co Ltd [1954] 2 Lloyds Rep 463, Devlin J said (at 475) recklessness “means deliberately running an unjustifiable risk”. In Shawinigan Ltd v Vokins and Co Ltd [1961] 3 All ER 396 at 403, Megaw J said “recklessness is gross carelessness” or “a high degree of carelessness”. His Honour continued:

The only test, in my view, is an objective one. Would a reasonable man, knowing all the facts and circumstances which the doer of the act knew or ought to have known, describe the act as ‘reckless’ in the ordinary meaning of that word in ordinary speech?

25.     That approach has been followed by the Tribunal in other cases. In Jones and Commissioner of Taxation [2003] AATA 84, I suggested at paragraph 26: “recklessness means more than mere carelessness. It incorporates an element of rashness or heedlessness”: see also The Taxpayer and Commissioner of Taxation [2004] AATA 1304 at paragraph 94; Arrow Pearl Co Pty Ltd and Commissioner of Taxation [2005] AATA 340 at paragraph 98. Recklessness falls short of a finding of intentional disregard, where the taxpayer or the agent presses a claim they know to be wrong. Similarly, a finding of recklessness does not imply the applicant or his agent were dishonest: see Hart v Commissioner of Taxation (2003) 131 FCR 203 at 214 per Hill and Hely JJ.

26.     I am satisfied the decision to submit the amended BAS is the product of recklessness on the part of the tax agent in particular. Mr Gillard should not have submitted the BAS when he had not obtained clear confirmation that the sale was subject to GST. He did not take any steps to check the details of the sale with the applicant’s former tax agent or his solicitor. He should have realised the portions of the draft contract he was provided might not have represented the final deal. The file note prepared by his employee recording Mr Dixon’s instructions to proceed does not make it clear the applicant was appropriately interrogated about the results of the inquiries he was undertaking. It is difficult to understand how any tax agent could have allowed an amended BAS to be submitted in those circumstances. The recklessness was clearly evident in Mr Gillard’s suggestion to the applicant that the amended BAS should be submitted on the understanding the money could simply be refunded if the claim turned out to be mistaken.

27.     It follows I am satisfied the decision to impose the penalty on the basis of recklessness was the correct and preferable decision.

should the penalty be remitted?

28. The Commissioner has the power to remit all or part of a penalty that has been imposed: s 298-20 of Division 284, Schedule 1 of the TAA. The Commissioner declined to exercise the power in this case. Section 14ZZK of the TAA requires that the applicant show the decision not to remit the penalty should have been made differently before the Tribunal is permitted to set aside the Commissioner’s decision.

29.     The applicant argued he was a novice in relation to the tax laws. He pointed out his late wife had always looked after his taxation affairs. He acknowledged he did not read documents closely but insisted he acted honestly at all times. He said he hired someone whom he took to be a competent professional and acted on his advice. Mr Dixon told the Tribunal he was not aware of the serious consequences attaching to a mistake.

30.     Even if I accepted the applicant was blameless in this affair, it does not follow that is a basis for remitting the penalty. The regulatory regime says the applicant is liable for penalties imposed in respect of his mistakes and those committed on his behalf by his agent. The parliament’s intention in imposing this form of statutory vicarious liability would be subverted if the penalty were to be remitted whenever the taxpayer established the error was attributable to the agent rather than the taxpayer. If the taxpayer is forced to accept a penalty that is attributable to an agent’s negligence, the taxpayer should consider suing the agent.

31.     Senior Member Pascoe suggested in Otway Pastoral Pty Ltd and Commissioner of Taxation [2005] AATA 649 that one must identify special circumstances before remitting a penalty. I agree: exercise of the discretion should be the exception rather than the rule. If it were otherwise, the deterrent effect of the penalties would be diminished. Deputy President Forgie said in Hobart Central Child Care Pty Ltd and Commissioner of Taxation [2005] AATA 1027 (at paragraph 205) the decision-maker must consider:

…circumstances that could be regarded as mitigating the taxpayer’s behaviour in some way while bearing in mind the purpose for which income tax is imposed and paid and the role of the [Income Tax Assessment Acts and the TAA].

32.     I do not think the search for mitigating circumstances is restricted to the taxpayer’s conduct. One must have regard to all the circumstances. In the course of that analysis, one must weigh the importance of preserving the deterrent value of the penalties against the hardship that will be imposed on a particular defendant. A penalty may be remitted (wholly or in part) in order to avoid a harsh outcome.

33.     In this case, the error in the amended BAS was detected before any refund was made. Mr Looney pointed out that was no thanks to the taxpayer: the error was discovered as a result of the diligence of the Commissioner’s personnel. That is true, and does no credit to the applicant’s case. But one cannot ignore the Commissioner has become entitled to collect a penalty in the amount of $85,681 even though he did not actually make the payment sought by the taxpayer. While I would not characterise that gain as a windfall, it seems to me the outcome is harsh.

34.     The penalty should be reduced to 25% of the shortfall amount (ie, half of the penalty that has been imposed should be remitted to the taxpayer) to reflect the fact that no harm was done. The taxpayer is still required to pay in excess of $40,000 - a swingeing reminder of the need for diligence in dealing with the tax office.

conclusion

35.     The Commissioner’s decision to impose a penalty at the rate of 50% on the amount of the tax shortfall is affirmed. The decision not to remit the penalty is varied. The Tribunal concludes the penalty should be fixed at 25% of the tax shortfall with the balance of the penalty to be remitted to the taxpayer.

I certify that the 35 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member B J McCabe

Signed:         ..Associate     Adam Ryan

Date of Hearing  2 February 2006
Date of Decision  17 February 2006
The applicant appeared in person.
The respondent was represented by Mr Looney of Counsel.