Research Scientist and Commissioner of Taxation
[2014] AATA 242
•28 April 2014
[2014] AATA 242
Division TAXATION APPEALS DIVISION File Number(s)
2012/2098-2100
Re
Research Scientist
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President S E Frost
Date 28 April 2014 Place Sydney Set aside the objection decision; substitute a decision that the objection is allowed in part, with the result that administrative penalty is reduced to 50% of the shortfall amount in each of the income years 2001, 2002 and 2003.
..........[sgd]..............................................................
Deputy President S E Frost
CATCHWORDS
TAXATION – administrative penalty – credits claimed for tax withheld in years when tax was not withheld – whether statements false or misleading in a material particular – shortfall amount – intentional disregard – recklessness – objection decision set aside; objection allowed in part
LEGISLATION
Administrative Appeals Tribunal Act 1975; s 39
Taxation Administration Act 195; s 14ZZK, Sch 1 ss 18-15, 284-75, 284-80, 284-85
CASES
BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164
De Simone v Commissioner of Taxation (2009) 51 AAR 161; [2009] FCAFC 181
Hart v Commissioner of Taxation (2003) 131 FCR 2003
Minister for Immigration v Dela Cruz (1992) 34 FCR 348
Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597
Sanctuary Lakes Pty Ltd and Commissioner of Taxation [2012] AATA 404Sullivan v Department of Transport (1978) 20 ALR 323
SECONDARY MATERIALS
Taxation Ruling TR 95/35
REASONS FOR DECISION
Deputy President S E Frost
28 April 2014
This is a case involving very narrow, straightforward issues.
Those issues are:
(i)Whether the taxpayer made statements to the Commissioner of Taxation that were false or misleading in a material particular;
(ii)If so, whether the taxpayer has a “shortfall amount” as a result of the statements;
(iii)If so, whether the shortfall amount resulted from intentional disregard of a taxation law;
(iv)If so, whether any resulting administrative penalty should be remitted.
The Commissioner answered those questions “yes”, “yes”, “yes” and “no” respectively. Administrative penalty was accordingly assessed, under Division 284 in Schedule 1 to the Taxation Administration Act 1953 (TAA), at 75% of the shortfall amount. The Commissioner declined to remit any of that penalty under s 298-20 in Schedule 1 to the TAA.
The taxpayer’s objection against those outcomes was disallowed.
The taxpayer applied to the Tribunal for review of the objection decision. In June 2013 the objection decision was remitted to the Commissioner under s 42D of the Administrative Appeals Tribunal Act 1975 (AAT Act) for reconsideration. However, the original decision to disallow the objection was affirmed.
In these proceedings the taxpayer bears the burden of proving that the assessment of penalty is excessive, and that the decision not to remit the penalty should not have been made or should have been made differently: s 14ZZK of the TAA.
THE FACTS
In 1988 the taxpayer commenced employment with a large research institution. That employment apparently progressed smoothly until about 1991, when what the taxpayer describes as a “controversy” arose in relation to certain matters including the nature of the duties that he was directed to perform. It is not necessary to go into any detail about that controversy.
Attempts to resolve the controversy between the taxpayer and his employer were unsuccessful. By mid-1995, and with the parties fundamentally at odds over how the dispute should continue to be handled, the employer notified the taxpayer that he was to be compulsorily retired. In February 1996 the employer purported to terminate the taxpayer’s employment, although the taxpayer maintained at the time, and he continues to maintain now, that there was no lawful termination of his employment in 1996. The taxpayer regarded the employer’s action as, among other things, an improper exercise of power. He commenced legal proceedings against his employer in an attempt to redress the wrongs that he claims had been done to him.
In any event, and since the employer evidently considered that the action it proposed was not improper or unlawful, in March 1996 it paid the taxpayer an amount on termination which included an amount treated by the employer as a “Lump Sum A” payment (that is, an amount paid for unused long-service leave and annual leave). Tax instalments were deducted from the total payment made by the employer. Later, in August 1998, the taxpayer received an amount from his superannuation fund, calculated as a gross amount less tax withheld.
From the very beginning the taxpayer has not agreed with the way the employer and the superannuation fund recorded those payments in the group certificates that were issued to him. He said this to the Tribunal on the first day of hearing:
We characterise the ’96 and ’98 transactions under TR 95/35 as compensation, rehabilitation, return-to-work type transactions governed by those laws. Under those laws we held the funds received as tax-exempt receipts in a defence fund and the money was then paid out in the three years 2001, 2002 and 2003 as a return-to-work stipend to me for services rendered in connection with repairing the damage done that was claimed in respect of the compensation/rehabilitation claim.
Perhaps that sounds more complicated than it is. The taxpayer’s position is simply this – the payments, although received in 1996 and 1998, did not need to be declared as assessable income in the corresponding tax years. They were, on his version, properly characterised as compensation receipts, capable of apportionment over later income years and assessable to him only when paid out to him from the “defence fund”. This was to be achieved, apparently, by the implementation of what he called a “Compensation Recovery Trust Account Arrangement”, or CRTAA.
Somehow the taxpayer convinced himself that by holding the 1996 and 1998 payments (which he described as “deposited funds from lumped financial transactions”[1]) in bank accounts “set up for the purpose of [SRO[2]] Holding Facility conducting the non-profit scientific research business specified in [SRO’s] Articles of Agreement …”[3], it was then appropriate to drip-feed the money to himself over a period that included the relevant tax years 2001, 2002 and 2003. The payer in that scenario would be the taxpayer himself, “in his capacity as [XYZ[4]] Research Unit”, and later [XYZ] Research Unit Pty Ltd. The taxpayer, not having declared any of the receipts in his tax returns for 1996 or 1999, would now declare the money as income as and when it was received from the payer in later years.
[1] Applicant’s Statement of Issues, page 5
[2] “SRO” is a pseudonym for the “small non-profit scientific research organisation” of which the taxpayer was the Principal
[3] Applicant’s Statement of Issues, page 5
[4] “XYZ” is another pseudonym, used to disguise the true name of the Research Unit
As if that arrangement was not curious enough, the taxpayer also convinced himself that he should not claim credits in the 1996 and 1999 income years in relation to the tax that had been withheld by his employer and the superannuation fund from the payments made in March 1996 and August 1998. Instead, and despite the clear fact that those amounts had been withheld in the 1996 and 1999 income years, he chose to claim them as credits towards the tax that would be calculated as payable on the income that he would declare in the later years.
In May 2004, he lodged his tax returns for the years 1996 to 2003 inclusive. In the 1996 and 1999 returns he did not declare the payments made to him as a consequence of the employer’s alleged “termination” of his employment. The returns for the 2001, 2002 and 2003 income years showed, among other things, the following:
Income year Allowances, benefits, earnings, tips,
directors fees etc
$
Tax withheld
$
2001 39,704 8,887.00 2002 40,214 9,047.00 2003 40,725 9,208.00
In addition to that, the taxpayer “solemnly and sincerely declare[d]”, in three statutory declarations made on 23 June 2004, that specified amounts of tax instalments had been deducted from his gross earnings during the 2001, 2002 and 2003 income years. The statutory declaration in each case specified a tax instalment amount that was $819 less than each of the “Tax withheld” amounts shown in the table in [13] above. That amount of $819 is said to be the tax payable on a gross amount, in each year, of $2,600, representing a “Directors fee” paid or payable to the taxpayer, and as reflected in a document styled “Taxation Advice”. When each of those Taxation Advices is read with the corresponding “Payment Advice” for a given year, the total amount said to be paid or payable to the taxpayer, and the total amount of tax on those totals, agree with the figures in the table in [13].
Taking the 2002 year as an example, the “Taxation Advice”, prepared on the letterhead of “[XYZ] Research Unit”, is expressed as follows[5]:
[5] T3-54
Taxation Advice
The following taxation advice has been received from the Holding Facility for […] research portfolio assets.
Tax Credits remitted on behalf of:
[Taxpayer’s name]
Start date: 1 July 2001
Finish date: 30 June 2002
Directors fee:
Gross: $2,600.00
Taxation: $819.00
Net: $1,781.00
For the same year, the “Payment Advice”, also on the letterhead of “[XYZ] Research Unit”, is expressed as follows[6]:
[6] T3-53
Payment Advice
Payee:
[Taxpayer’s name]
Start date: 1 July 2001
Finish date: 30 June 2002
Professional Services:
Gross: $37,614 .00
Taxation: $8,228.00
Net: $29,386.00
The “Notice of assessment and liability to pay penalty” at T9-91 shows that administrative penalty was imposed in the following amounts:
·For the 2001 year – $6,258.15
·For the 2002 year – $6,785.25
·For the 2003 year – $6,906.00
The amount of penalty for each of the 2002 and 2003 years is exactly equal to 75% of the “Tax withheld” figure in [13]. The amount of penalty for 2001 therefore seems somewhat understated but there is no suggestion now that the Commissioner wishes to disturb the amount imposed.
PROCEDURE – GIVING A PARTY A “REASONABLE OPPORTUNITY” TO PRESENT ITS CASE
Towards the end of the second day of hearing the taxpayer complained that he had been given insufficient time, during the hearing, to identify documents that would support some of the answers he gave to questions asked of him by Mr O’Mahoney of counsel, who appeared for the Commissioner, or by me. He claimed that if he had been given more time he would have been able to identify further documents, already before the Tribunal, that would have explained his position more fully.
I did not want the taxpayer to be disadvantaged in that way. Accordingly I invited him to draw to my attention, within a week after the end of the hearing, any documents that were already before the Tribunal and which he thought might provide a more comprehensive answer to the questions he had been asked. Upon receiving that invitation, the taxpayer indicated that there were further documents in his files, which were not before the Tribunal, and which also might help him to establish his case. At that point I indicated to him that he would need to seek leave to rely on these further documents and that such a grant of leave was by no means guaranteed.
On 13 February 2014 the taxpayer provided a further folder of documents, some of which had, and some of which had not, previously been filed in the Tribunal. Having regard to the pre-hearing timetable, which required the taxpayer to file all the evidence on which he wished to rely by 31 October 2013, and having regard also to the fact that the taxpayer should have been in no doubt, well before then, as to the central issues in this case, I did not consider it appropriate to allow the taxpayer to rely on any of those documents lodged on 13 February 2014 that had not previously been filed in the Tribunal.
I took that view, mindful of the requirement in s 39 of the AAT Act that the Tribunal must “ensure that every party to a proceeding before the Tribunal is given a reasonable opportunity to present his or her case”. That had occurred in this case; the Tribunal is not under the more onerous obligation of ensuring that a party takes the best advantage of that opportunity: Sullivan v Department of Transport (1978) 20 ALR 323 at 343; Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597 at 611; De Simone v Commissioner of Taxation (2009) 51 AAR 161; (2009) 77 ATR 936; [2009] FCAFC 181 at [15]–[18].
WERE THE STATEMENTS MADE TO THE COMMISSIONER FALSE OR MISLEADING IN A MATERIAL PARTICULAR?
This is the question posed by s 284-75(1) in Schedule 1 to the TAA, which, at the relevant time, was in the following terms (note omitted):
(1) 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.
The statements in the taxpayer’s tax returns for the 2001, 2002 and 2003 tax years, to the effect that the specified amounts of tax had been withheld during the relevant years, were false. No such amounts had been withheld during those years, either by the Research Unit or by anyone else.
Were the statements false “in a material particular”?
In Sanctuary Lakes Pty Ltd and Commissioner of Taxation [2012] AATA 404 at [187] Deputy President Forgie expressed the view, with which I respectfully agree, that the following principles, established by a Full Federal Court in the context of s 20(1) of the Migration Act 1958 in Minister for Immigration v Dela Cruz [1992] FCA 71; (1992) 34 FCR 348 at [12]-[13]; 352, are equally applicable in the context of the tax penalty regime in Schedule 1 to the TAA:
… The term “material” requires no more and no less than that, the false particular must be of moment or of significance, not merely trivial or inconsequential.
Section 20(1) does not apply to statements that are merely false or misleading; there is the added requirement that the statement must be false or misleading in a material particular. In the context of s.20(1), a statement will be false or misleading in a material particular if it is relevant to the purpose for which it is made: see Jovcevski v. Minister for Immigration, Local Government and Ethnic Affairs (Lockhart J., 12 October 1989, unreported). A statement will be relevant to that purpose if it may – not only if it must or if it will – be taken into account in making a decision under the Act as to the grant of the visa or entry permit in respect of which the statement is made.
Adapting that language to the current case, the question is whether the Commissioner might take into account a taxpayer’s claim for withholding credits, when deciding how much credit the taxpayer should be given against tax payable on an assessment made. Clearly, the answer to that question is yes. Undoubtedly, the taxpayer’s statements were false “in a material particular”.
DID THE TAXPAYER HAVE A “SHORTFALL AMOUNT” AS A RESULT OF THE STATEMENTS?
This question is posed by the former s 284-75(1)(c) in Schedule 1 to the TAA, quoted in [19] above.
“Shortfall amount” is dealt with in s 284-80(1) in the following way (note omitted):
(1)You have a shortfall amount if an item in this table applies to you. That amount is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been.
Shortfall amounts Item You have a shortfall amount in this situation: 1 … 2 An amount that the Commissioner must pay or credit to you under a *taxation law for an accounting period, or under a tourist refund scheme under Division 168 of the *GST Act or Division 25 of the A New Tax System (Wine Equalisation Tax) Act 1999, worked out on the basis of the statement is more than it would be if the statement were not false or misleading 3 … 4 …
Section 18-15(1) in Schedule 1 to the TAA is the provision under which the taxpayer would be entitled to a credit for tax withheld. (The TAA is plainly a “taxation law” as defined: see ss 3AA and 3A of the TAA and s 995-1 of the Income Tax Assessment Act 1997.) The taxpayer has a shortfall amount because the amount the Commissioner must credit under s 18-15(1) in Schedule 1 to the TAA, worked out on the basis of the statement in the tax return, is more than it would be if the statement were not false or misleading.
In his August 2012 Statement of Facts and Contentions the taxpayer stated:
… a lumped TFN tax credit covering CRTAA tax obligations was remitted to the ATO in August 1998 by [the superannuation fund]. An earlier lumped TFN tax credit was also remitted by [the former employer] in March 1996. The Respondent has examined necessary documentation regarding those lumped TFN credits and now appears to agree they were paid at those times. …
No tax shortfall is generated by an apportionment of lumped tax credits into smaller annualised component amounts, as reported by [SRO] for relevant tax years.
…
No tax shortfall has been generated by [SRO’s] method of reporting the TFN tax credits. (emphasis added)
Those highlighted statements are wrong. They pay no regard to the words “for an accounting period” in item 2 in the table in s 284-80(1) in Schedule 1 to the TAA ([26] above). Tax returns are expected to be accurate year on year. The fact that the Commissioner would have credited the taxpayer in 2001, 2002 and 2003 with amounts that had not been withheld in those years means that the taxpayer has a “shortfall amount” in each of those years.
DID THE SHORTFALL AMOUNT RESULT FROM INTENTIONAL DISREGARD OF A TAXATION LAW?
Working out the amount of penalty starts with s 284-85 in Schedule 1 to the TAA. Subsection (1) provides as follows:
Work out the *base penalty amount under section 284-90. If the base penalty amount is not increased under section 284-220 or reduced under section 284-225, this is the amount of the penalty.
The base penalty amount was neither increased nor reduced, and so the amount of the penalty is simply the “base penalty amount”, to be found in the table in s 284-90. The table reads as follows:
Base penalty amount Item In this situation: The base penalty amount is: 1 You have a *shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from intentional disregard of a *taxation law by you or your agent 75% of your *shortfall amount or part 2 You have a *shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a *taxation law 50% of your *shortfall amount or part 3 You have a *shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a *taxation law 25% of your *shortfall amount or part 3A … 3B … 3C … 4 … 5 … 6 … 7 …
The Commissioner thought item 1 applied. In light of s 14ZZK of the TAA, it is the taxpayer’s task to prove the Commissioner wrong.
Ever since the taxpayer lodged his application in the Tribunal in May 2012, he has been intent on focusing on matters that are irrelevant (or, if I were to take a generous view, at best tangential) to the central issue in this case. This is despite the many attempts by the Commissioner’s representatives, and the Tribunal, to explain why those matters are irrelevant. They include unnecessary detail in relation to the grievance with his employer, the claimed unlawfulness of its purported termination of his employment, his assertion that Taxation Ruling TR 95/35 supported the way he declared his income (even though TR 95/35 does not touch upon that question), and the complaints he has had with the behaviour or actions of various officers of the Commissioner, including unfounded and scandalous assertions of bad faith on the part of taxation officers. All of these issues are distractions. They have served only to deflect the taxpayer from any consideration of personal responsibility for the position in which he now finds himself.
The one issue that he needed to address was why he claimed credits for tax withheld in 2001, 2002 and 2003 when no such withholdings were made in those years. There is precious little material before me on that issue. In his document dated 31 January 2013 and entitled “Response to Respondent Request concerning Reasonable Care”, which became Exhibit A6, the following appears at [22]:
Tax return reporting in 2004 was based on a brief prepared in calendar year 2003 by [my brother], [SRO] and the Applicant based on coordination and consolidation of the aforementioned sources of professional advice received during 1996-2001.
The taxpayer was asked repeatedly on the second day of hearing if he could identify and locate the “brief” referred to, or any examples of written advice provided to him by any of his advisers touching upon his entitlement to claim credits for tax withheld during the 2001, 2002 and 2003 income years. The first such request was met with this surprising response:
Well, I have a copy of the brief … I’m happy to tender that brief if you’d like. I just didn’t want to overburden you with too much information …
The so-called “brief” was examined by Mr O’Mahoney – whose treatment of the taxpayer throughout the hearing was both fair and patient – who noted that there was nothing in the document to indicate that questions had been asked of tax agents as to how tax returns might be compiled. It seems to me that the “brief” was actually a blueprint prepared by the taxpayer as to how things would be done, rather than a request for advice.
The taxpayer said there had been discussions with the Tax Office before the returns were lodged, the suggestion being that there had been reasonably detailed disclosure of the facts and either approval of the proposed approach or at least some guidance on how to proceed. But there is no written evidence to that effect. Exhibit A8 is a note, prepared by the taxpayer and dated 4 June 2004 (that is, after the lodgement of the tax returns in question), which is apparently a summary of a discussion between the taxpayer and his tax agent around that time, and presumably in relation to an earlier discussion between the tax agent and someone in the Tax Office. The note contains unconnected jottings which do not present a coherent record of what was discussed either between the tax agent and the Tax Office, or between the taxpayer and his tax agent.
The extensive material provided to the Tribunal, and two full days of hearing, have provided me with some insight into the taxpayer’s state of mind at the time the tax returns for 2001, 2002 and 2003 were lodged. I accept that he did not agree with the information he was given by the employer in March 1996 and the superannuation fund in August 1998. I accept that he believed he was doing the right thing when he instructed his tax agent to lodge the returns for 2001, 2002 and 2003 as he did. I accept that he believed the figures declared for income and expenses in those years were accurate. I also accept that he considered it appropriate to claim, in those years, credit for tax paid so as to absorb the tax liability.
But there was no reasonable basis on which he could have claimed those credits.
In a letter dated 19 August 2013 to one of the Commissioner’s officers, the taxpayer’s “adviser” – a person with no taxation qualifications and, it seems, little expertise in the area – summarised what lies behind the taxpayer’s unshakeable belief in the various positions taken in the 2001, 2002 and 2003 tax returns. The letter referred at [32] to:
·necessary and legitimate reporting adjustments to correct for fraud and to ensure proper reporting in re legal, financial and taxation entitlements of a fraud victim;
·associated adjustments involving receipts of compensation-rehabilitation income;
·associated adjustments involving payments to and tax refund entitlements of a qualified rehabilitation & repair worker, for carrying out necessary remedial work
…
It also alleged against the taxation officer “an underlying motive of you seeking to prolong a blame-the-fraud-victim witch hunt”. There is no justification for that allegation, and I reject it.
There is nothing to show that the so-called “necessary and legitimate reporting adjustments” were signed off by an appropriately qualified tax adviser; there is not even anything to show that an appropriately qualified tax adviser was asked to express an opinion on them. The taxpayer continued to maintain that he had got extensive tax advice but he could not point me to a single document that either asked or answered a question about the claimed entitlement to the tax credits.
The taxpayer complained that it was unreasonable to examine the accuracy of the statements about the tax credits in isolation from the other matters reported in the tax returns. On the second day of hearing he said:
We can’t isolate PAYG[7] from income and expenditure. You can’t pick up PAYG and pretend it is not connected with income and expenditures.
…
And I’m saying that the income and expenditure data on which those PAYG statements were based is crucially important if you’re talking about PAYG …
[7] “Pay As You Go”
But each entry in a tax return is a separate “statement” for the purposes of the administrative penalty provisions and needs to be separately assessed in that context.
Having regard to the taxpayer’s state of mind, as I have found in [38] above, I am satisfied that the shortfall amounts did not result from intentional disregard of a taxation law. But they certainly resulted from recklessness as to the operation of a taxation law. That recklessness, or “gross carelessness” (BRK (Bris) Pty Ltd v FC of T [2001] FCA 164 at [77], endorsed in Hart v FC of T (2003) 131 FCR 2003; [2003] FCAFC 105 at [33] and [43]), is demonstrated by the taxpayer’s not having sought or taken advice on the specific question of the entitlement to the tax credits.
SHOULD THE PENALTY BE REMITTED TO ANY EXTENT?
The taxpayer submitted that the position he had taken was a “reasonably arguable” one, and that for that reason he should not be liable to a penalty.
The short response is that not only was his position not reasonably arguable, it was not even remotely arguable. There is simply no argument available to him to support the position that he took, of claiming to be entitled to credits for tax withheld in the 2001, 2002 and 2003 income years. There was no such tax withheld. The taxpayer acknowledged that he regarded the amounts that he included in the returns as “PAYG reconciliation” amounts. The question whether they were amounts “withheld”, and the even more pointed question whether they were withheld in those years, did not really enter into his thinking.
There are no grounds for remission of the penalty from the rate of 50% of the shortfall amount for each year.
DECISION
The Tribunal sets aside the objection decision and substitutes a decision that the objection is allowed in part, to reduce the penalty to 50% of the shortfall amount in each of the tax years 2001, 2002 and 2003, and specifically:
(a)For the 2001 year – $4,443.50;
(b)For the 2002 year – $4,523.50;
(c)For the 2003 year – $4,604.00.
I certify that the preceding 53 (fifty -three) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost ...........[sgd].............................................................
Associate
Dated 28 April 2014
Dates of hearing 5 and 6 February 2014 Date final submissions received 13 February 2014 Applicant In person Counsel for the Respondent Mr G O'Mahoney Solicitors for the Respondent ATO Legal Services
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