RHXV and Commissioner of Taxation (Taxation)
[2021] AATA 1349
•14 May 2021
RHXV and Commissioner of Taxation (Taxation) [2021] AATA 1349 (14 May 2021)
Administrative Appeals Tribunal
ADMINISTRATIVE APPEALS TRIBUNAL )
) No: 2019/4008
TAXATION AND COMMERCIAL DIVISION )Re: RHXV
Applicant
And: Commissioner of Taxation
RespondentCORRIGENDUM
TRIBUNAL: Deputy President Boyle
DATE OF CORRIGENDUM: 21 May 2021
PLACE: Perth
The Tribunal directs the Registrar, pursuant to section 43AA(1) of the Administrative Appeals Tribunal Act 1975 (Cth), to alter the text of the decision in this application as follows:
- Delete the reference to “[60]” in paragraph [61] and replace with “[56(i)]”.
..................................[SGD].................................
Deputy President
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2019/4008
Re:RHXV
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President Boyle
Date:14 May 2021
Place:Perth
The decision dated 5 June 2019 to disallow the Applicant’s objection to an assessment of shortfall penalty for the 2017 income year in the amount of $2,965.55 and not to remit the penalty or part of the penalty and to not grant penalty relief is affirmed.
...[ SGD]................................................................
Deputy President Boyle
CATCHWORDS
TAXATION – objection to assessment of shortfall penalty – refusal to remit penalty – Applicant failed to exercise reasonable care in maintaining records of deductions claimed – lack of evidence to prove that the penalty was not properly imposed – Applicant failed to discharge burden of proof (TAA s 14ZZK) – reviewable decision affirmed
LEGISLATION
Taxation Administration Act 1953 (Cth) – ss 14ZQ, 14ZS(1), 14ZY(1), 14ZY(2), 14ZZ(1), 14ZZK, 284-75, 284-80, 284-90, 284-90(1), 298-20, sch 1
CASES
Aurora Developments Pty Ltd v Commissioner of Taxation (No 2) (2011) 196 FCR 457
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60
Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483
Zhang and Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs [2021] AATA 1051
SECONDARY MATERIALS
Australian Taxation Office, Practice Statement Law Administration PS LA 2007/22 (6 May 2020) – para 23
REASONS FOR DECISION
Deputy President Boyle
14 May 2021
THE APPLICATION
The Applicant seeks review of the Respondent’s (Commissioner) decision dated 5 June 2019 to disallow the Applicant’s objection to an assessment of shortfall penalty for the 2017 income year in the amount of $2,965.55 (2017 Penalty) and not to remit the 2017 Penalty or part of the 2017 Penalty (Objection Decision).
BACKGROUND
The facts set out herein are taken from the Commissioner’s outline of written submissions dated 17 February 2021 (Commissioner’s Outline). They were not disputed by the Applicant.
The Applicant is currently 45 years old. He has been employed since at least 2012 as a computing professional/ systems analyst.
The Applicant has filed income tax returns in Australia since the 2012 income year.
On 16 July 2017 the Applicant lodged his income tax return for the 2017 income year (the 2017 return).[1] On 21 July 2017 the Commissioner issued the Applicant with a notice of assessment for the 2017 income year.[2]
[1] T3.
[2] T5.
Between 20 July 2017 and 29 September 2017 the Applicant amended his 2017 return as follows:
Amendment Date Notice of amended assessment issue date Outcome of notice 20 July 2017 27 July 2017 $2,844.27 credit 25 August 2017 21 February 2018 $1,916.85 credit 28 August 2017 21 February 2018 $385.71 credit 29 September 2017 21 February 2018 $780.00 debit 29 September 2017 21 February 2018 $17,764.36 debit
On 28 September 2017 the Commissioner issued a letter to the Applicant which advised that the processing of his 2017 return was delayed and sought further information. The letter advised that the Applicant needed to provide supporting documentation in respect of his claims for various deductions in the sum of $52,895.[3]
[3] T9.
By letter dated 16 November 2017[4] the Applicant provided a response to the Commissioner’s letter of 28 September 2017 which:
(a)stated, “[t]he new claim has been changed. These changes happened as the tax return was lodged by client who is not aware that some of expenses is non-deductable [sic]”;[5]
(b)enclosed a completed schedule in which some of the deductions claimed were reduced;[6] and
(c)provided supporting documents.[7]
[4] T11.
[5] T11/63.
[6] T11/64–73.
[7] T11/ 74–5; T12–T19.
Further documents relating to the Applicant’s deduction claims were provided by the Applicant’s accountant under cover of an email dated 12 December 2017[8] and subsequent emails.[9]
[8] T20.
[9] T21–T43.
On 21 February 2018 the Commissioner notified the Applicant that, as a result of an audit, his claimed deductions for the 2017 income year would be reduced by $47,758,[10] as detailed in the table below:
[10] T44; see however Note at the end of paragraph.
Item Original amount New amount (after audit) D1 Work-related car expenses $3,283 $0 D2 Work-related travel expenses $789 $0 D3 Work-related clothing expenses $197 $0 D4 Work-related self-education expenses $3,415 $0 D5 Other work-related expenses $2,028 $0 D6 Low-value pool deduction $239 $0 D8 Dividend deductions $33,510 $1,894 D9 Gifts or donations $150 $0 D10 Cost of managing tax affairs $407 $0 D15 Other deductions $5,146 $3,243 13 Partnership losses $3,191 $0 Total deductions $52,895 $5,137 [Note: The figure of $52,895 used by the Commissioner in this calculation appears to be incorrect. The amount claimed by the Applicant was $52,355. This also means that the claimed deductions for the 2017 income year would be reduced by $47,218, rather than $47,758 as asserted earlier in this paragraph.]
As a result of the audit, the Applicant was found to have an overall tax shortfall of $17,764.36 for the 2017 income year.
On 21 February 2018 the Commissioner issued a notice of amended assessment to the Applicant for the 2017 income year.[11] On the same date, the Commissioner also issued the Applicant a notice of assessment of shortfall penalty of $8,882.15 as a result of the Applicant making a false or misleading statement in his 2017 return.[12] The penalty was imposed at a rate of 50 per cent on the basis that the false or misleading statement was due to recklessness.
[11] ST1.
[12] T7.
On 23 September 2018 the Applicant lodged an objection which sought review of the notice of amended assessment and notice of assessment of shortfall penalty for the 2017 income year (2017 Objection).[13] The grounds of the Applicant’s objection were set out in an attachment to the objection titled “Application to Waive off Shortfall Amount and Interest” (Grounds of objection).[14]
[13] T45.
[14] T46.
On 26 April 2019 the Applicant also lodged an objection which sought review of the notice of amended assessment and notice of assessment of shortfall penalty for the 2016 income year (2016 Objection).
The 2016 Objection and 2017 Objection were the subject of the Objection Decision. However, as full penalty relief was applied to the 2016 Objection, and the Applicant otherwise does not seek review of the 2016 Objection, the assessment and penalty in respect of the 2016 income year are not before the Tribunal.
With respect to the 2017 Objection, by the Objection Decision the Commissioner:
(a)allowed in part various deductions as detailed below:
Item Original amount (after audit) New amount (after objection) D5 Other work-related expenses $0 $343 D8 Dividend deductions $1,894 $14,791
(b)recalculated the 2017 Penalty at the rate of 25 per cent of the revised shortfall amounts, on the basis that the Applicant had demonstrated a lack of reasonable care, rather than recklessness. As a result, the 2017 Penalty was reduced from $8,882.15 to $2,965.55;
(c)exercised his discretion not to remit any part of the revised 2017 Penalty of $2,965.55; and
(d)did not apply penalty relief in respect of the 2017 Penalty.
THE HEARING
The application was heard on 25 February 2021. The Applicant self-represented and the Commissioner was represented by Ms N Dubey. The Applicant was the only witness to give evidence.
The Tribunal had before it the following documents:
(a)Undated document headed “Statement Request to Waive of the Penalty” filed 23 September 2019 (Applicant’s Statement);
(b)Commissioner’s Statement of Facts, Issues and Contentions dated 20 March 2020 (Commissioner’s SFIC);
(c)Commissioner’s Outline;
(d)T documents (T1–T110) filed 2 August 2019; and
(e)Supplementary T document (ST1) filed 28 January 2021.
The only aspect of the Objection Decision of which the Applicant seeks review is the application of the 2017 Penalty and the Commissioner’s decision not to remit any part of the revised 2017 Penalty of $2,965.55 or to grant relief.
ISSUES
The Commissioner identifies the issues for determination by the Tribunal as:
(a)Issue 1: whether the 2017 Penalty for lack of reasonable care was properly imposed pursuant to ss 284-75 and 284-90 of sch 1 to the Taxation Administration Act 1953 (Cth) (TAA); and
(b)Issue 2: whether the 2017 Penalty should be remitted in part or in full under s 298-20 of Schedule 1 to the TAA.
The Tribunal also needs to determine whether penalty relief should be granted, as the Objection Decision addressed that issue and although not specifically stated, the broad terms of the 2017 Objection could encompass that issue.
The Applicant did not specifically identify the issues to be determined in these proceedings. The Tribunal agrees that the issues identified by the Commissioner, with the addition of whether penalty relief should be granted, are the issues that the Tribunal is to determine. Both parties proceeded on the basis of those being the issues.
LEGISLATIVE FRAMEWORK
Section 14ZZ(1) of the TAA relevantly provides that:
(1)If the person is dissatisfied with the Commissioner's objection decision … the person may:
(a)if the decision is a reviewable objection decision - either:
(i)apply to the Tribunal for review of the decision; or
…
Section 14ZY(2) of the TAA defines an objection decision as, amongst other things, a decision made by the Commissioner in respect of an objection lodged with the Commissioner. The Objection Decision is an objection decision as that term is defined in s 14ZY(2) of the TAA.
Section 14ZQ defines a reviewable objection decision as one “that is not an ineligible income tax remission decision”. That latter term is defined in s 14ZS(1) of the TAA. The Objection Decision is not an ineligible income tax remission decision as that term is defined. The Objection Decision is, therefore, a reviewable objection decision for the purposes of s 14ZZ(1) of the TAA.
Section 284-75 of the TAA (sch 1) relevantly provides as follows:
284-75 Liability to penalty
(1) You are liable to an administrative penalty if:
(a)you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law (other than the *Excise Acts); and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
…
(Original emphasis.)
(5) You are not liable to an administrative penalty under subsection (1) … for a statement that is false or misleading in a material particular if you, … took reasonable care in connection with the making of the statement.
Section 284-80 of the TAA relevantly provides:
284-80 Shortfall amounts
(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.
(Original emphasis.)
Item 1 of the table in s 284-80 is:
A *tax-related liability of yours for an accounting period, or for a *taxable importation, or under the Superannuation (Unclaimed Money and Lost Members) Act 1999, worked out on the basis of the statement is less than it would be if the statement were not false or misleading.
Section 284-90 of the TAA relevantly provides:
284-90 Base penalty amount
(1) The base penalty amount under this Subdivision is worked out using this table and subsections (1A) to (2), and section 284-224 if relevant:
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 (other than the *Excise Acts) 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 (other than the *Excise Acts)
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 (other than the *Excise Acts)
25% of your *shortfall amount or part
…
(Original emphasis and formatting.)
The Objection Decision determined that a 25 per cent penalty under item 3 in the table in s 284-90 of the TAA applied on the basis that the Applicant had failed to take reasonable care to comply with the taxation law.[15]
[15] T2/16 para [155].
Section 14ZZK of the TAA provides:
On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b)the applicant has the burden of proving:
(i)if the taxation decision concerned is an assessment—that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(ii) in any other case—that the taxation decision concerned should not have been made or should have been made differently.
ISSUE 1: WAS THE 2017 PENALTY FOR LACK OF REASONABLE CARE PROPERLY IMPOSED PURSUANT TO SS 284-75 AND 284-90 OF SCH 1?
The Commissioner’s contentions
The Commissioner’s Outline, which reflects the Commissioner’s SFIC, contends in relation to Issue 1 that:
(a)The Applicant has the onus of establishing that the 2017 Penalty is excessive.
(b)Pursuant to s 284-75(1) of sch 1 to the TAA, a taxpayer is liable for an administrative penalty where the taxpayer or their agent makes a statement to the Commissioner and that statement is false or misleading in a material particular.
(c)The Applicant made statements to the Commissioner in his 2017 return which were false or misleading in a material particular because the Applicant failed to include the correct amounts for his claims for deductions. The Applicant does not seek to challenge that. As a result of those false or misleading statements, a shortfall amount arose because the Applicant’s tax liability was less than it would have been if the statements were not false or misleading.
(d)The Applicant is therefore liable for administrative penalties pursuant to s 284-75(1) of sch 1 to the TAA for having an income tax shortfall for the 2017 income year.
(e)In accordance with item 3, s 284-90(1) of sch 1 to the TAA, the base penalty is 25 per cent of any shortfall amount where that amount results from failure by the Applicant to take reasonable care in filing his 2017 return.
(f)The Applicant bears the onus of proving that he took reasonable care in connection with the making of a statement for the purposes of s 284-75(5) of Schedule 1 to the TAA so that he is not liable to an administrative penalty pursuant to s 284-75(1) of Schedule 1 to the TAA.
(g)The “reasonable care” test in item 3 of s 284-90 of sch 1 to the TAA requires a taxpayer to:
“... exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer in fulfilling the taxpayer's tax obligations. The test looks to whether such a person would have foreseen, as a reasonable probability or reasonable likelihood, the prospect that the action or step or the failure to act or take an affirmative step would result in a shortfall amount and in determining that questions, a relevant factual enquiry is whether the taxpayer made the reasonable attempts a person in the position of the taxpayer ought to have taken so as to comply with the provisions of a taxation law.”[16]
[16] Aurora Developments Pty Ltd v Commissioner of Taxation (No 2) [2011] FCA 1090; (2011) FCR 457 at [38] (Greenwood J).
(h)Based on the Application for Review[17] and the Applicant’s Statement, the Applicant does not appear to challenge the 2017 Penalty Assessment on the basis that he has exercised reasonable care. Rather, the Applicant seeks remission of the administrative penalty, or penalty relief in respect of that penalty, based on compassionate grounds only. By his own admission in the Applicant’s Statement, the Applicant:
[17] T1.
(i)is satisfied with the Objection Decision outcome;
(ii)relied on his own interpretation, presumably when preparing, lodging and amending the 2017 return;
(iii)alleges that he amended his 2017 return after not receiving clear answers from the Australian Taxation Office (ATO) customer service support;
(iv)accepts that it was his mistake for not contacting a tax professional. There is otherwise no evidence that the Applicant engaged a registered tax agent in preparing and lodging his 2017 return;
(v)after receiving the audit notification letter dated 28 September 2017 (before which the Applicant had amended his 2017 return several times), acknowledges that the figures therein were incorrect and “highly magnified” and amended his 2017 return at least once more out of panic; and
(vi)states that he made a mistake and promises he will be more careful in the future.
(i)The Applicant has provided minimal evidence in support of the steps that he took to exercise reasonable care in complying with his tax obligations. This forms a significant barrier to the discharging of his onus of proof. There are no factors that compromised the Applicant’s capacity to seek advice or comply with his tax obligations.
(j)The deductions claimed by the Applicant in the 2017 income year constitute a significant proportion of his total income, being over 30 per cent of his total income for that year. In circumstances involving a substantial amount of tax payable, a taxpayer will be required to exercise a higher standard of care because the risk and consequences involved are greater.
(k)The Applicant is not new to the Australian income tax system. The Applicant’s lodgement and reporting history indicates that he possesses a reasonable understanding of tax laws. The Applicant is an educated, sophisticated taxpayer who conducted share investing activities in the 2016 and 2017 financial years and appears to be a partner in a wholesale textile products business.
(l)The Applicant did not make sufficient efforts to comply with his taxation obligations, commensurate with his background, knowledge and resources. The lack of appropriate inquiries made, and self-interpretation undertaken in the absence of professional advice, falls short of the standard of care that would be reasonably expected of the Applicant.
(m)A reasonable person in the Applicant’s circumstances would have:
(i)kept appropriate records to substantiate the amounts claimed, and otherwise been aware of the requirement to keep those records. The Commissioner determined that the Applicant was not entitled to claim various deductions on the basis that the amounts claimed were non-deductible or the Applicant did not have sufficient records to support such a claim;
(ii)before making a lodgement or an amendment, read the relevant guidance provided by the Australian Taxation Office (ATO) and made appropriate inquiries with the ATO to verify their claims;
(iii)before making a lodgement or an amendment, sought appropriate advice from a tax agent or accountant to verify their claims, especially if there were doubts as to the correct taxation treatment of the expenses claimed as deductions; and
(iv)foreseen or ought to have foreseen that, by claiming expenses for which he was not entitled to claim as a deduction or claiming expenses for which he did not keep supporting records for, his tax liability would be understated.
The Applicant’s contentions
The Applicant’s contentions are not clearly expressed. Noting that much of what the Applicant says in the Grounds of objection[18] and the Applicant’s Statement is irrelevant to the issues to be determined, the Tribunal understands the Applicant’s position in relation to both Issue 1 and Issue 2 to be as follows:
[18] T46.
(a)The Applicant seeks the “waiver” of the penalty.[19]
[19] Applicant’s Statement para [1].
(b)He does not dispute the substantive tax assessment.[20]
[20] Applicant’s Statement para [2].
(c)He spent in the region of $3,000 on professional assistance for the tax audit process and did not have the financial resources to retain professional help for his amended taxation return.[21]
(d)The time and money that the Applicant spent on the audit process and dealings with the ATO took a toll on his mental health.[22]
(e)He always called the ATO customer support line when he was not clear on an issue concerning his tax return. He was always advised to put the claim in and the ATO would contact him if it needed further information.[23]
(f)The first tax return that he submitted in respect of the 2017 financial year was submitted by mistake when his “computer hanged and the submit button got clicked by mistake”.[24]
(g)He is normally very careful in keeping backups of his data and for many years nothing happened. He changed his laptop and “by the time [he] was thinking to transfer the data for backup [his] computer crashed”.[25]
(h)The amendments to his 2017 return were made after he contacted the ATO customer support where he “didn’t get the clear answers”.[26]
(i)He accepts that it was a mistake not to get professional tax advice.[27]
(j)He panicked after the audit and again changed the figures in his 2017 return.[28]
(k)He accepts that this was a mistake but says that it was not a repeat mistake.[29]
(l)“Considering this as my first mistake and the two years of struggle (time, mentally and financially), it is my humble request to consider my request to waive off $3093 as penalty”.[30]
[21] Applicant’s Statement para [4].
[22] Applicant’s Statement para [6].
[23] Applicant’s Statement para [10].
[24] Applicant’s Statement para [11].
[25] Applicant’s Statement para [12].
[26] Applicant’s Statement para [13].
[27] Applicant’s Statement para [14].
[28] Applicant’s Statement para [15].
[29] Applicant’s Statement para [16].
[30] Applicant’s Statement para [18].
Consideration
Unfortunately, the basis of the dispute was not particularly clear from the documents submitted by the parties, the T documents and the parties’ submissions (both written and made orally at the hearing). In particular, it is not clear (at least not clear to the Tribunal) upon what basis the Commissioner says that the Applicant failed to exercise reasonable care to comply with the taxation law. The Commissioner appears to put forward two separate arguments. The first seems to be that the Applicant failed to get professional advice as to what expenses were properly claimable as deductions, thereby failing to exercise reasonable care. The second argument is that the Applicant failed to keep adequate records to substantiate the deductions that he claimed and thereby failed to exercise reasonable care.
The Tribunal sought clarification of the Commissioner’s position from counsel in opening at the hearing. The following exchange occurred:
TRIBUNAL: But you're referring to a failure by the taxpayer to seek, presumably, professional accounting advice.
MS DUBEY: Yes.
TRIBUNAL: That would be a criticism that could be levelled if the deductions claimed had no legal basis. But isn't it the case that, certainly to some degree, if not totally, it was not a misunderstanding of the tax law in relation to what could or couldn’t be claimed. It was an inability, physically, to be able to produce documents to substantiate the deductions claim. Is that a fair summary?
MS DUBEY: That would be a fair summary, but I understand that the failure to substantiate just relates to a particular period. And so the records that were being kept before and after that period were also not sufficient for the audit and objections process.
TRIBUNAL: But what - I think there are two types of failure to take care, isn't there? There's the type that, well, taxpayers making - and I'm not saying this is the case here - but taxpayers making cavalier or brave calls for what is deductible, which are just simply not sustainable as a matter of tax law. In which case you'd say, well, you should have got proper advice as to what was legitimately claimable as a deduction. That's error type one. The other error is just failing to keep records adequately, so that you can substantiate the legitimate claims you do make. Are you able to say: does the applicant in this case fall into the first category or the second category?
MS DUBEY: That's correct, Deputy. The second category. I don't - we have not had - initially when the audit was commenced, I understand that we considered him to fall into the first category, and the penalty was applied on the basis of recklessness. But following the objections process and further engagement with the taxpayer, it was reduced to reasonable care, so it's category 2.[31]
[31] transcript at 6–7.
While the above exchange may seem to have clarified why the Commissioner says the Applicant failed to exercise reasonable care, the exchange between the Tribunal and the Commissioner’s counsel continued as follows:
TRIBUNAL: That's correct. But one of the elements that you point to as to what the taxpayer should have done in this case is to obtain advice. But that wouldn't have solved the problem, because the problem was driven by inability to - or failure, in the first place, either to keep or then an inability to access documents.
MS DUBEY: Access - and also, how forthcoming he was in the provision of records, in the sense that if he had advice then perhaps he wouldn't have been lodging five amendments in a two month period, and would have a better understanding of which records were relevant to his returns.
TRIBUNAL: Yes - but that's really not something that would attract a penalty, normally, would it? I mean, a taxpayer - it might be sloppy and annoying and cause wasted time for the tax department, but I don't know that that incurs a penalty per se, does it? Taxpayers can change their returns.
MS DUBEY: Yes, of course. We would say that these features feed into his - to the standard of reasonable care. And that's - - -
TRIBUNAL: But the standard of reasonable care is as to the keeping of records, not understanding the tax law per se.
MS DUBEY: I think it also comes to his failure to provide any records at all for some of the deductions claimed, and not - and that isn't directly caused by just not having his computer hard drive. Because I understand that the records from that hard drive were fixed for a particular period, and it wasn't for the entire return period. And in any case, we would also submit that given the taxpayers specific circumstances - that he is a professional in the IT industry - it's quite surprising that this one issue would prevent him being able to provide records across all of the deductions claimed.
TRIBUNAL: Yes. I suppose that goes to a slightly different issue again, though, doesn't it? I suppose that goes to whether or not the taxpayer is believed as to whether or not he's incurred those expenses. Whereas I understand the commissioner's case, really, to be that he failed to exercise the required level of care in keeping his records - not illegitimately claiming expenditures that were not actually incurred.
MS DUBEY: That is correct, Deputy President.[32]
[32] transcript at 8.
Notwithstanding that the above exchange would appear to have confirmed that the Commissioner’s case was that the Applicant failed to exercise reasonable care by not keeping proper records, the way that the parties’ arguments at hearing and the cross-examination of the Applicant evolved, it appeared that the Commissioner still relied on the Applicant having made claims for expenses that were not, as a matter of principle, deductable, to be part of the Applicant’s failure to take reasonable care. That is clearly the thrust of the submission referred to in [32](l) and [32](m) above, and [56](f) below. Further, the Applicant was cross-examined at some length on his claim for a deduction of $3,415 for “self-education”. He had produced some documents to support this cost being incurred, however, this claim was rejected, both originally and in the Objection Decision,[33] on the basis that the Applicant could not produce sufficient records, and also on the basis that the deduction could not be claimed for the 2017 financial year because it was not incurred in that year. The Applicant’s evidence at the hearing was that he actually incurred that cost in 2012.[34] The following exchange occurred:
TRIBUNAL: No, did you provide documents showing that you had spent $3,415
APPLICANT: Yes. But yes, but basically they said because it was a previous year, because I said because I did on my basis of that letter basically. I called - that says that if you haven’t claimed anything previously, you can have it as a carry-forward loss basically. Then I called tax office to understand what that letter means basically and they said, okay, if you want, you can - you can - you can - - -
TRIBUNAL: When do you say you incurred these $3000 in costs?
APPLICANT: It was a way a long back.
TRIBUNAL: When?
APPLICANT: At that time - somewhere in 2012 or something like that.
TRIBUNAL: That’s not claimable. That was knocked back - that claim deduction was knocked back on, it was simply not an expense incurred in the financial year.
APPLICANT: Yes, because I was putting as - because I called because due to that letter I tried to understand what that letter means, that you put or carry-forward loss basically. Then I called the tax office people to understand what that letter mean. They said, okay, if - they said that - I said where should I put that if I haven’t claimed anything previously, right, where should I put it?
[33] T2/10 para [59].
[34] transcript at 31.
This type of evidence was not limited to the claim for education costs. While the Applicant’s evidence was confused and confusing in a lot of respects, it emerged at the hearing that the rejections of the expenses claimed by the Applicant were, in some cases, because they were misconceived as well as not being supported by sufficient evidence.
Even after the cross-examination of the Applicant, it was still not clear on what basis the Commissioner was arguing that the Applicant had failed to exercise reasonable care to attract the base penalty of 25 per cent. The following exchange took place:
TRIBUNAL: It appears to me that having - putting aside the issue as to whether or not the evidence is accepted, it does seem to me that the basis upon which the commissioner has run its argument is not – or is questionable now, isn’t it? I think we went through – the basis of the carelessness that the respondent asserts against the applicant is that he failed to keep proper records. What I heard here, however, is that, if you look at paragraph 19 and the deductions which were subsequently – well, made and subsequently disallowed, very few of them were disallowed on the basis of a lack of evidence.
MS DUBEY: The commissioner would rely on the objection decision and from the items in that decision there are three categories, items D2, 5 and 6, where there were no records provided to substantiate the claims. Items 4, 8, 9 and 13, the observation is made that the taxpayer was not entitled to those deductions and, even if he was, there were not any records available. So our plan for the penalty rests on the lack of provision of records in categories 2, 4 and 6 in particular.
…
TRIBUNAL: So you say travel expenses, D2, D5 and D6.
MS DUBEY: These items were clearly not allowed because of the failure of record - to provide records, and the other key feature of our decision to impose a penalty is at paragraphs 173 and 174, that the applicant could have made attempts to obtain the records that were missing but did not provide us with any evidence that he had, in fact, made those attempts, apart from one email about PPE purchases and a reference to working from home.[35]
[35] transcript at 46.
In further discussion between the Tribunal and the Commissioner’s counsel it emerged that there were in fact several bases and mixtures of bases for the rejection of the Applicant’s claims, including having no legal basis and failing to provide (or keep) adequate records to substantiate the amount claimed, or a combination of both. In the end it emerged that the failure to take reasonable care relied on by the Commissioner is a mix of failing to keep and produce adequate records to substantiate the amounts claimed by the Applicant and/or the Applicant making claims that had no proper basis, for instance the education costs incurred five years before the relevant tax year. That mix of reasons also emerges from the Objection Decision.
The Applicant’s case was unclear to start with and, unfortunately, probably became even less clear as the hearing proceeded. The Commissioner contends that the Applicant does not challenge the 2017 Penalty assessment on the basis that he has exercised reasonable care, but rather seeks remission of the administrative penalty, or penalty relief in respect of that penalty, based on compassionate grounds only (see [32](h) above). The Tribunal does not think that that is the case. While the Applicant’s written submissions set out in the Grounds of objection[36] and the Applicant’s Statement might suggest that to be the case, that appears to be a product of the Applicant not having a particularly good command of English and using ambiguous or confused language in his written material. The Tribunal understood the thrust of a number of the arguments raised by the Applicant at the hearing to be going to whether he had exercised reasonable care. As an example, the Applicant repeatedly referred, or at least alluded, to his computer crashing which prevented him from accessing the records that would have substantiated the deductions. The Tribunal understood the Applicant’s argument to be that he was not careless, rather he was the victim of an unfortunate failure of technology. In other words, he argues that the penalty is not appropriate because he was not careless.
[36] T46.
The Evidence
There was a large number of documents provided by the Applicant to the Commissioner which were included in the T documents. Some of those documents may have assisted in substantiating the Applicant’s deduction claims notwithstanding that the audit conducted by the ATO found that they did not. However, the Applicant did not take the Tribunal to these documents in any way which would have shown that the documentation that he had provided to the Commissioner was sufficient, or shown that the Applicant had, contrary to the Commissioner’s assertion, kept sufficient records to evidence that the costs which he had claimed as deductions had been incurred. It is not the Tribunal’s job to plough through the T documents to identify documents that might support the Applicant’s claim. That is the Applicant’s job.[37]
[37] See Zhang and Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs [2021] AATA 1051 at [62].
There were 11 items of expenditure which were claimed by the Applicant and which were disallowed in whole or in part (see [10] above). The reason for rejection of each of those items was explained in the Objection Decision.[38] In each case one of the reasons given was that the Applicant had not provided sufficient evidence to substantiate the claimed cost. In some cases (for instance the claim for education costs; see [37] above) the claims were also rejected on principle as not being claimable as deductions.
[38] T2/8–14.
The Applicant did not, in any of the 11 claims, take the Tribunal to the documentation that he produced to the ATO to substantiate the claim. As noted above, the Applicant claimed that he had had the relevant documents but that his computer had crashed and that he was now unable to access those documents. The Applicant’s evidence was not convincing. In any event the claim that he cannot now access these documents is not an explanation for making claims which were, as a matter of principle, not legitimately claimable.
The Applicant’s evidence as to the timing of the computer crash was confusing. He lodged the last of his revised 2017 returns in September 2017 (see [6] above). He was asked to provide further information and documents to support his claims in September 2017 (see [7] above) and did provide additional documents in November 2017 (see [8] above) and December 2017 (see [9] above). His evidence at the hearing, however, was that the computer crash, which he claims prevented him getting access to his records, occurred in January 2018. His evidence was:
APPLICANT: Crashed basically, yes, where I normally - I normally keep two backups of mine, but by the time I – I was thinking to keep the backup of it, I got on my new computer, I was to going – then it was a matter of time that I said I will do it later. By the time – by the time I lost my job then I looking for the job too, then I have to relocate to Canberra for my job basically, so all things came together basically.
TRIBUNAL: When do you say your computer crashed?
APPLICANT: In - my computer got somewhere in - when I reached Canberra, in January, basically.
TRIBUNAL: But that was January 2018?[39]
[39] transcript at 27.
The Applicant says that it was only in January 2018 that the ATO asked for him to provide these documents. That was not the case (see [7]–[9] above). Even if it were the case, it seems odd to the Tribunal that the Applicant had not provided these documents to the ATO with the returns submitted in June to September 2017 nor with the additional materials provided in November and December 2017. Presumably he would have needed to have had access to these documents in September 2017 when he submitted the last amended 2017 return to calculate the amount of the deductions being claimed. The Tribunal does not believe that the Applicant, knowing that such claims have to be supported by evidence, would not have provided those documents if they existed when he submitted the last of his revisions of the 2017 return in September 2017, or when the additional documents were provided in November and December 2017.
The Applicant did not provide any independent evidence to support the assertion that his computer crashed or that the documents that he claims to have stored in the computer are not accessible. Further, there was no evidence presented by the Applicant as to what steps he took to obtain copies of the documents that he claims to have had on his computer from the source of those documents.
Because of the lack of documentation presented by the Applicant, or even details of what those documents were, the Tribunal is not in a position to make any assessment of whether the documents that the Applicant claims not to be able to now access would have been sufficient to substantiate the claimed deductions. The basis upon which the Applicant apparently seeks to rebut the Commissioner’s assertion that he failed to keep adequate records, is that the records he once had are now not accessible. That, however, would only be a legitimate response to that allegation of carelessness if the documents were sufficient to substantiate the claimed deductions. In that regard, the carelessness asserted by the Commissioner cannot be that the Applicant failed to keep records— a taxpayer is not under a legal obligation to keep records of such expenses unless he claims them as deductable. Obviously, a failure to keep records of travel expenses and the like is not, of itself, a breach of the taxation law, nor does it amount to carelessness, if the taxpayer does not claim such costs as deductable. As the Applicant did, however, claim these deductions, the carelessness would be in failing to keep adequate records to substantiate the claims or making the claims knowing that they could not be substantiated. While the Applicant may assert that he cannot now access those records, we have no way of knowing whether the documents that he claims to have had stored on his laptop would have been sufficient. It may be that those records would have been inadequate to substantiate the amounts that he claimed in which case the allegation of carelessness could still be levelled against the Applicant.
The Applicant’s explanations for making the claims that were rejected on principle were not convincing. As an example, the Applicant’s explanation for claiming the education costs in the 2017 return when they were incurred in 2012 was confused and seemed to change. He sought to justify making the claim for a deduction on the basis of a letter that he had received from the ATO in relation to his 2015 tax return[40] and a conversation that he claimed to have had with someone at the ATO. His evidence was as follows:
[40] T90.
TRIBUNAL: Sorry, your evidence just doesn’t make any sense. When do you say the $3,415 that you’re claiming for the tax year up to 30 June 2017, when was that incurred? When did you actually pay that money?
APPLICANT: Yes, I actually paid that money.
TRIBUNAL: When?
APPLICANT: This money I actually paid back - back in - the previous year which I was going through this letter.
…
TRIBUNAL: … You’re saying that when you spoke to this person in the tax office, which was about an amendment to your 2015 return, somehow - and when she says in this – or when this letter says that the tax losses can be carried forward into subsequent years. Is your evidence to me under oath, that she told you that expenses incurred in 2012 can be claimed in the 2017 tax return?
APPLICANT: Well, I asked her when I - clarification on this letter. I mean I wasn’t - - -
TRIBUNAL: This letter relates to 2015, not ’17.
APPLICANT: Yes, because on the basis of this letter, I asked this thing, that if you - if it’s over two years previous basically, can I – can I claim the – the one which I haven’t claimed in my previous year. Basically, can I claim this because according to this letter it was my - - -
TRIBUNAL: It wasn’t the previous year. It was five years earlier.
APPLICANT: Yes, it was five, but it says more than two years. If anything is more than two years, basically.
TRIBUNAL: So you took that to be – we’re now getting to a whole different level of carelessness. Even if I were to believe you, you’re saying that you were exercising reasonable care, were you, in claiming, in 2017, $3,415 in relation to education expenses you incurred in 2012, based on that letter and conversation you had.
APPLICANT: Yes.[41]
[41] transcript at 37–8.
The Applicant’s above explanation does not withstand basic scrutiny. As the Tribunal pointed out to the Applicant in the above exchange, there is no way that the letter from the ATO could be taken as suggesting that education costs incurred in 2012 could be claimed as deductable in the tax return for 2017. Further, given the content and context of that letter, the Tribunal does not accept the Applicant’s evidence that the person in the ATO to whom he spoke (about that letter) would have advised him that “expenses incurred in 2012 can be claimed in the 2017 tax return”.
It is the Tribunal’s finding that in making the claims for deductions that he did, the Applicant failed to exercise reasonable care either because he had taken insufficient care to ascertain whether, as a matter of principle, the deductions were claimable under the tax law or, insofar as the deductions may have been claimable in principle, ensuring that there were sufficient records to substantiate the claims. Either way, the Applicant failed to exercise reasonable care and is liable to the base penalty amount of 25 per cent under item 3 in the table in s 284-90 of the TAA.
The Applicant has not discharged the burden imposed by s 14ZZK (see [31] above) of proving:
(a)that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(b)that the taxation decision concerned should not have been made or should have been made differently.
The answer to Issue 1 is therefore that the penalty for lack of reasonable care was properly imposed pursuant to ss 284-75 and 284-90 of sch 1 of the TAA.
ISSUE 2: SHOULD THE 2017 PENALTY BE REMITTED IN PART OR IN FULL UNDER S 298-20 OF SCHEDULE 1 TO THE TAA?
Section 298-20 of Schedule 1 to the TAA relevantly provides:
(1)The Commissioner may remit all or a part of the penalty.
(2)If the Commissioner decides:
(a) not to remit the penalty; or
(b) to remit only part of the penalty;
the Commissioner must give written notice of the decision and the reasons for the decision to the entity.
…
The Applicant does not claim that the Commissioner failed to give written reasons for his decision not to remit the penalty or any part thereof. The Objection Decision clearly sets out those reasons.[42]
[42] T2/16 paras [176]–[178].
Commissioner’s submissions
The Commissioner’s Outline contends that:
(a)The discretion to remit a penalty would only be exercised in those exceptional cases where the application of the penalty would provide a clearly unreasonable or unjust result. (Citing Sanctuary Lakes Pty Ltd v Federal Commissioner of Taxation[43] (Sanctuary Lakes)).
(b)In exercising this discretion, the Commissioner is to take into consideration the purpose of the penalty regime, being to deter non-compliance where taxpayers are required to self-assess their tax obligations.[44]
(c)The discretion must be exercised for a proper purpose and a penalty should not be remitted without just cause, arbitrarily or as a matter of course.
(d)The onus is on the taxpayer to satisfy the Tribunal, having regard to the taxpayer’s particular circumstances, that it is appropriate to remit the penalty in part or in full.[45]
(e)The Applicant is only seeking remission on compassionate grounds. As such, the Commissioner does not consider that the Applicant has demonstrated the existence of any facts or circumstances, in the Applicant’s Statement or otherwise, that would warrant the exercise of the Commissioner’s discretion to remit, in part or in full, the 2017 Penalty. Nor is there any evidence before the Tribunal of any mitigating circumstances to warrant remission or that the imposition of the penalty would be unjust, unreasonable or harsh.
(f)The tax shortfall and imposition of the 2017 Penalty have arisen as a consequence of the Applicant’s conscious decisions which were made in the absence of appropriate enquiries or professional advice. These decisions were not the result of isolated book-keeping or record-keeping errors. Further, the Applicant failed to produce various supporting documentation to substantiate his entitlement to the deductions claimed.
(g)The Commissioner acknowledges the claimed temporal, mental and financial impact that the audit and objection process may have had on the Applicant, however, this is not a relevant consideration in circumstances where the Applicant was responsible for his predicament.
(h)Remission would be unfair and unjust to all other taxpayers who are still able to comply with their tax obligations by keeping appropriate records and seeking appropriate advice.
(i)Penalty relief may apply in penalty objections where the original audit or review case was in progress on or after 1 July 2018 and the objection decision reduces the penalty to the base penalty for failure to take reasonable care.[46] As the audit in relation to the 2017 income year was finalised prior to 1 July 2018, the 2017 Penalty is ineligible for penalty relief.
[43] Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50; (2013) 212 FCR 483 (Sanctuary Lakes).
[44] Citing Sanctuary Lakes at [247] (Griffiths J).
[45] Citing Sanctuary Lakes at [249] (Griffiths J).
[46] PS LA 2012/5 Administration of penalties for making false or misleading statements that result in shortfall amounts – Attachment B at para 23.
Applicant’s submissions
As noted earlier, the documents submitted to the Tribunal by the Applicant (see [33] above) did not distinguish between Issues 1 and 2 and insofar as those documents made submissions relevant to Issue 2, they are set out in [33] above.
Consideration
The discretion under s 298-20 of sch 1 to the TAA is a broad one. The question which arises under that provision “is simply whether the decision-maker is satisfied having regard to the taxpayer’s particular circumstances that it is appropriate to remit penalty in whole or in part”.[47] Accordingly, the “power under s 298-20 requires consideration to be given to the particular circumstances of the taxpayer”.[48]
[47] Sanctuary Lakes at [249] (Griffiths J).
[48] Sanctuary Lakes at [251] (Griffiths J).
The Tribunal notes that there is an ATO Practice Statement Law Administration 2007/22 (the Practice Statement), which is an instruction to ATO staff concerning the exercise of the discretion under s 298-20 of sch 1 of the TAA. It is appropriate for the Tribunal to have regard to the policy expressed in the Practice Statement in reviewing the objection decision; however, the Tribunal is not bound by it, as the law lies in the statutory text of s 298-20 of sch 1 of the TAA.[49]
[49] Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60, 69–70 (Bowen CJ and Deane J).
The Commissioner’s contentions set out in [56] above are correct. The Applicant has not pointed to any of his particular financial or personal circumstances, or the particular circumstances surrounding the Applicant’s understatement of his assessable income which would make non-remission of the penalty “unreasonable or unjust (and therefore inappropriate)” – using the language of Sanctuary Lakes at [249]. As far as the Tribunal is concerned the Commissioner’s decision not to exercise the discretion to remit any part of the penalty was, and still is, the correct and preferable decision.
Further, insofar as the Applicant can be taken to be seeking penalty relief, for the reasons set out in [56(i)] above, the 2017 Penalty is ineligible for penalty relief.
DECISION
For the reasons set out above, the decision dated 5 June 2019 to disallow the Applicant’s objection to an assessment of shortfall penalty for the 2017 income year in the amount of $2,965.55 and not to remit the penalty or part of the penalty or grant penalty relief is affirmed.
I certify that the preceding 62 (sixty-two) paragraphs are a true copy of the reasons for the decision herein of Deputy President Boyle
...[SGD].....................................................................
Associate
Dated: 14 May 2021
Date of hearing: 25 February 2021 Applicant: In person Counsel for the Respondent: Ms N Dubey Solicitors for the Respondent: Australian Taxation Office
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