Rizkallah and Commissioner of Taxation (Taxation)
[2022] AATA 3081
•16 September 2022
Rizkallah and Commissioner of Taxation (Taxation) [2022] AATA 3081 (16 September 2022)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2020/3036
2020/3037
2021/7593
2021/7627
Re:Rebecca Rizkallah
APPLICANT
AndCommissioner of Taxation
RESPONDENT
Decision
Tribunal:Senior Member Dr Linda Kirk
Date:16 September 2022
Place:Sydney
The Tribunal varies the Reviewable Decisions to exercise the discretion under s 298-20(1) of the TAA to remit the administrative penalty by 25%. The Reviewable Decisions are otherwise unchanged.
...............................[SGD].................................
Senior Member Dr Linda Kirk
Catchwords
TAXATION – Income Tax – review of objection decision – deductions – whether outgoings of rental property eligible for deduction under s 8-1 of Income Tax Assessment Act 1997 (Cth) – where property leased to husband – expenses not incurred in the course of producing assessable income – where losses or outgoings are of a private or domestic nature – whether administrative penalty should be imposed – where conduct amounts to recklessness as to operation of taxation law – whether discretion should be exercised to remit any part of the penalties – objection decisions for assessment of income affirmed – objection decisions as to penalties varied to partially remit penalties.
Legislation
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth)
Cases
Bocaz v Commissioner of Taxation [2012] AATA 847
BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347
Burns and Commissioner of Taxation [2019] AATA 3860
Commissioner of Taxation v Cassaniti (2018) 266 FCR 385
Commissioner of Taxation v Janmoor Nominees Pty Ltd (1987) 15 FCR 348
Corlette v McKenzie (1995) 62 FCR 584
Danmark Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333
Federal Commissioner of Taxation v Dalco [1990] HCA 3
Federal Commissioner of Taxation v Groser (1982) 65 FLR 121
Federal Commissioner of Taxation v Kowal (1983) 79 FLR 75
Gauci v Federal Commissioner of Taxation [1975] 135 CLR 81
GSJW and Commissioner of Taxation (Taxation) [2019] AATA 5170
Hart v Commissioner of Taxation [2003] FCAFC 105
Hua-Aus Pty Ltd v Commissioner of Taxation (2010) 184 FCR 430
Imperial Bottleshops Pty Ltd and Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148
M64/2015 v Minister for Immigration and Border Protection (2015) 258 CLR 173
Madigan v Commissioner of Taxation (1996) 68 FCR 12
McCormack v Commissioner of Taxation (1979) 143 CLR 284
Rawson Finances Pty Ltd v Federal Commissioner of Taxation (2013) 93 ATR 775
Re Abichandani v Commissioner of Taxation [2019] AATA 4296
Re Coppell v Federal Commissioner of Taxation (2000) 44 ATR 1001
Re Diarra and Commissioner of Taxation [2019] AATA 5545
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Re Picton Finance Ltd v Federal Commissioner of Taxation (2013) 93 ATR 876
Re Yazbek and Commissioner of Taxation [2014] AATA 423
Ronpibon Tin NL v Commissioner of Taxation (Cth) (1949) 78 CLR 47
Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483
Schweitzer and Commissioner of Taxation (Taxation) [2019] AATA 1100.
Sivai v Commissioner of Taxation [2021] SCA 1253Trautwein v Federal Commissioner of Taxation [1936] HCA 77
Secondary Materials
Taxation Ruling IT 2167 Income Tax: rental properties – non-economic rental, holiday home, share of residence, etc
REASONS FOR DECISION
Senior Member Dr Linda Kirk
16 September 2022
INTRODUCTION
This is an application for review by the Tribunal under Part IVC of the Taxation Administration Act 1953 (Cth) (‘TAA’) of decisions (‘the Reviewable Decisions’) made by the Commissioner (‘the Respondent’) on the following dates with respect to the objections made by Rebecca Rizkallah (‘the Applicant’):
(a)On 6 March 2019 which disallowed an objection made by the Applicant in relation to notices of amended assessment (‘Amended Assessments’)[1] for the 2016 and 2017 income years (‘the relevant years’).
(b)On 20 September 2021 which disallowed an objection made by the Applicant in relation to notices of administrative penalty (‘Penalty Assessments’)[2] for the relevant years.
[1] Exhibit R1, T24, 427; T25, 434.
[2] Exhibit R1, T26, 440; T27, 444; ST10, 509; ST11, 513.
On 19 May 2020, the Applicant submitted an application for review of the Reviewable Decisions relating to the objection decisions, and submitted an application dated 10 October 2021 in respect of the penalty decisions on 14 October 2021 (collectively, ‘the Review Application’).
The Review Application was heard by the Tribunal on 10 and 19 May 2022. The Applicant attended the hearing by video-conference and was represented. She gave oral evidence and was cross-examined at the hearing.
The following documents were admitted as evidence:
·Hearing Book containing all evidence before the Tribunal, filed by the Respondent on 9 May 2022. (Exhibit R1).
The Tribunal has reviewed the evidence and refers to all relevant materials below.
LEGISLATIVE FRAMEWORK
Taxpayer’s onus of proof
For the purposes of this application, the provisions of the Administrative Appeals Tribunal Act 1975 (Cth) are modified by section 14ZZK of the Taxation Administration Act 1953 (Cth) (‘TAA’) which provides, in so far as it is relevant:
On an application for review of a reviewable objection decision:
…
(a)the applicant has the burden of proving that:
(i) if the taxation decision concerned is an assessment—the assessment is excessive or otherwise incorrect and what the assessment should have been; or ...
Deductions
Section 8-1 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA’) allows a deduction for losses and outgoings which are incurred in the course of gaining or producing assessable income (unless that loss or outgoing is capital, private or domestic in nature).
8‑1 General deductions
(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a)it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
Note:Division 35 prevents losses from non‑commercial business activities that may contribute to a tax loss being offset against other assessable income.
(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
(a)it is a loss or outgoing of capital, or of a capital nature; or
(b)it is a loss or outgoing of a private or domestic nature; or
(c)it is incurred in relation to gaining or producing your *exempt income or your *non‑assessable non‑exempt income; or
(d)a provision of this Act prevents you from deducting it.
There must be a connection or nexus between the loss or outgoing and the assessable income, so that the loss or outgoing is directly related to the production or gaining of that assessable income. A loss or outgoing can only be deducted to the extent in which it is incurred in producing assessable income. Where a loss or outgoing has been incurred for both income producing and private purposes, the loss or outgoing must be apportioned.
Voluntary Disclosure
Section 284-225(5) of Sch 1 to the TAA provides for the consequences to a taxpayer for the making of a Voluntary Disclosure.
If you voluntarily tell the Commissioner, in the *approved form, about your *shortfall amount or *scheme shortfall amount, part of it or the false or misleading nature of the statement after the Commissioner tells you that an examination is to be conducted of your affairs relating to a *taxation law for a relevant period, the Commissioner may treat you as having done so before being told about the examination if the Commissioner considers it appropriate to do so in the circumstances.
Administrative Penalty
Section 284-75(1) of Sch 1 to the TAA provides that a person will be liable to an administrative penalty if he or she:
(a)makes a statement to the Respondent 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 the things in it or omitted from it.
Section 284-75(5) of the TAA provides that a taxpayer is not liable to an administrative penalty under subsection (1) for a statement that is false or misleading in a material particular if they, and their agent (if relevant), took reasonable care in connection with the making of the statement.
The amount of the penalty applied is calculated pursuant to sections 284-85(1) and 284‑90(1) of Sch 1 to the TAA:
(a)25% for failure to take reasonable care to comply with a taxation law;
(b)50% for recklessness as to the operation of a taxation law; and
(c)75% for ‘intentional disregard’ of a taxation law.
Remission of Penalty
Section 298-20(1) of Sch 1 to the TAA provides:
1The Commissioner may remit all or a part of the penalty.
2If 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.
2If:
(a)the Commissioner refuses to any extent to remit an amount of penalty; and
(a)the amount of penalty payable after the refusal is more than 2 penalty units; and
(b)the entity is dissatisfied with the decision;
the entity may object against the decision in the manner set out in Part IVC.
Safe Harbour provision
Section 284-75(6) of Sch 1 to the TAA provides a ‘safe harbour’ provision:
6You are not liable to an administrative penalty under subsection (1) or (4) if:
(a)you engage a *registered tax agent or BAS agent; and
(b)you give the registered tax agent or BAS agent all relevant taxation information; and
(c)the registered tax agent or BAS agent makes the statement; and
(d)the false or misleading nature of the statement did not result from:
(i) intentional disregard by the registered tax agent or BAS agent of a *taxation law (other than the *Excise Acts); or
(ii) recklessness by the agent as to the operation of a taxation law (other than the Excise Acts).
7If you wish to rely on subsection (6), you bear an evidential burden in relation to paragraph (6)(b).
ISSUES FOR DETERMINATION
The issues for determination are:
1) Whether the losses and outgoings incurred by the Applicant for her rental property are deductible under s 8-1(1)(a) of the ITAA.
2) Whether the Applicant is excluded from deducting these losses and outgoings in whole or in part as they are a loss or outgoing of a private or domestic nature under s 8-1(2)(b).
3) The amount, if any, of the administrative penalty to be imposed on the Applicant under s 284-75 of Schedule 1 to the TAA.
4) Whether the administrative penalty should be remitted pursuant to s 298-20(1) of Schedule 1 to the TAA.
5) There is no dispute between the parties in relation to the quantum of the outgoings incurred in the relevant years.
EVIDENCE BEFORE THE TRIBUNAL
The Applicant acquired a newly constructed property located at 3/18 Gosling Street, Greenacre, NSW 2190 (‘the property’) on 30 September 2009 for $300,000.[3] The property consists of three bedrooms, two bathrooms and one carport.[4] The Applicant funded the acquisition of the property using a loan from the Commonwealth Bank of Australia (‘CBA Loan’).[5] The settlement of the property occurred on 2 September 2010.[6]
[3] Exhibit R1, ST1, 453.
[4] Respondent’s submissions at [5]. The property forms one half of a duplex house arranged side by side and is part of a townhouse complex of 5 residences. It has 3 bedrooms, 2 bathrooms and 1 carport. The land size of the property is 802m2 and floorplan is 127m2: T15-248. It has 3 bedrooms, 2 bathrooms and 1 carport. The land size of the property is 802m2 and floorplan is 127m2: T15-246.
[5] Exhibit R1, T10, 190.
[6] Exhibit R1, ST1, 453; Exhibit R1, Respondent’s Statement of Facts, Issues, and Contentions (RSFIC), 19 at [6].
Following the purchase of the property, the Applicant resided in it as her principal place of residence. After six months, the Applicant was unable to keep up the repayments on the property. On 14 June 2011 she moved into her parents’ house at 5/18 Gosling Street Greenacre, NSW 2190 (‘the parents’ house’) and she let the property to a tenant.[7]
[7] Exhibit R1, Applicant’s Statement of Facts, Issues, and Contentions (ASFIC), 10.
On 5 May 2015, Mr George Daouk (‘Mr Daouk’) arrived in Australia as the holder of a partner visa sponsored by the Applicant. Following his arrival in Australia, Mr Daouk lived at the parents’ house with the Applicant. Shortly before they married, the Applicant became aware of Mr Daouk’s gambling problems. After the couple married on 9 August 2015, they lived together at the property for about one month, following which the Applicant returned to live at the parents’ house. While they were living apart, the couple’s relationship was ‘on and off’, and they formally separated at the end of 2015 before reconciling again in 2017.[8]
[8] Transcript of proceedings dated 19 May 2022 (Transcript), 12.
The Applicant and Mr Daouk entered into a tenancy agreement (‘the tenancy agreement’) commencing on 25 September 2015.[9] The agreed monthly rent was $1016 in cash, which is what Mr Daouk said he could afford to pay at the time.[10] The Applicant asked her family, who are in the building industry, about the agreed rent and they said it was ‘reasonable’.[11] The tenancy agreement was meant to be temporary as the Applicant was hoping she and Mr Daouk would reconcile.[12]
[9] Transcript, 17.
[10] Transcript, 21.
[11] Transcript, 22.
[12] Transcript, 22.
Mr Daouk made rental payments to the Applicant in respect of his tenancy of the property during the relevant period. He was unable to pay rent regularly as he was still dealing with a gambling addiction. The total amount of rent the Applicant received averaged $1,000 per month (equivalent to a weekly rental amount of $231 per week) for the 2016 income year, and $1,016 per month (equivalent to a weekly rental amount of $235 per week) for the 2017 income year.[13] The Applicant continued to pay for the utilities, contents insurance, strata fees, council rates and all expenses related to the maintenance of the property.[14] She confirmed during cross-examination that Mr Daouk did not undertake any repairs or maintenance to the property.[15]
[13] Exhibit R1, ST5, 483.
[14] Transcript, 24-28.
[15] Transcript, 17-18.
On or around 1 August 2017, the Applicant and her husband reconciled, and she moved back into the property.[16] This coincided with the birth of the couple’s first child in September 2017.[17] Their daughter was born in May 2019,[18] and from that point the Applicant and the children slept at the property, but she and Mr Daouk were separated.[19]
[16] Exhibit R1, T17, 324.
[17] Exhibit R1, T15, 285; Transcript, 32.
[18] Transcript, 33.
[19] Transcript, 18.
The Applicant incurred interest expenses on the CBA Loan as follows:[20]
a)$11,900 for the 2016 income year
b)$13,600 for the 2017 income year
[20] Exhibit R1, Respondent’s submissions, 26 at [10].
The Applicant incurred other outgoings in relation to the property as follows: [21]
a)$1,381.90 for the 2016 income year
b)$2,477.15 for the 2017 income year.
NJR Formwork Pty Ltd
[21] Exhibit R1, Schedule A to Respondent’s submissions, 35.
On 20 November 2002, NJR Formwork Pty Ltd (‘NJR’) was registered as a proprietary limited company. It was deregistered on 22 April 2013.[22] The Applicant told the Tribunal that NJR was a company operated by her father and brother. NJR built both the Applicant’s property and the parents’ house.[23]
[22] Exhibit R1, T17, 324.
[23] Transcript, 38.
The Applicant claimed deductions for repair/maintenance works performed by NJR in respect of the property in the relevant years.[24] All tax invoices issued by NJR to the Applicant for repair/maintenance works done on the property post-date its deregistration.[25]
[24] Exhibit R1, T15, 292.
[25] See Exhibit R1, T8, 171, 172.
The Applicant initially claimed that the property was substantially improved during the relevant years, and she claimed capital allowance deductions in relation to the construction cost for those structural improvements carried out by NJR on the property in the amount of $198,000 (‘post-acquisition capital works’).[26]
Income Tax Returns
[26] Exhibit R1, T8, 170.
On 19 August 2016, the Applicant lodged her income tax return for the year ended 30 June 2016.[27] The Applicant reported rent of $12,000 and included as deductible rental expenses:
·Interest expense $17,085
·Capital allowances $8,910
·Other deductions (including repairs/maintenance) $11,525
Total outgoings $37,520.[28]
[27] Exhibit R1, T3, 56.
[28] Exhibit R1, Respondent’s submissions, 27 at [16].
On 18 August 2017, the Applicant lodged her income tax return for the year ended 30 June 2017.[29] The Applicant reported rent of $12,200 and included as deductible rental expenses:
·Capital allowances $13,160
·Interest deductions $15,200
·Other deductions (including repairs/maintenance) $11,260
Total outgoings $39,620.[30]
[29] Exhibit R1, T4, 86.
[30] Exhibit R1, Respondent’s submissions, 27 at [17].
Audit and objections
On 6 November 2017, the Respondent commenced an audit of the Applicant’s taxation affairs for the relevant years.[31]
[31] Exhibit R1, T5, 88.
On 19 December 2017, the Applicant made representations to the Respondent that the rent paid under the tenancy agreement was decided on the basis it was similar to other units in the same strata, and neither the Applicant nor any of her associates were residing at the property.[32]
[32] Exhibit R1, T8, 133.
On 13 June 2018 the Applicant:
a)made a voluntary disclosure that the property had not been renovated/improved and that she had incorrectly claimed deductions for post-acquisition capital works, and she wished to withdraw all deductions relating to supplies made by NJR;
b)requested the Respondent consider a BMT depreciation report as substantiation for her allowable deductions relating to capital allowances in her 2016 and 2017 income tax returns.[33]
[33] Exhibit R1, T14, 273.
On 22 August 2018, the Respondent issued Amended Assessments for each of the relevant years,[34] disallowing the rental deductions set out at paragraphs [25] and [26] above.[35]
[34] Exhibit R1, T24, 428; T25, 434.
[35] Exhibit R1, T22, 365; T23, 395.
On 22 August 2018, the Respondent issued Penalty Assessments for each the relevant years at the rate of 50% for recklessness.[36]
[36] Exhibit R1, T26, 440; T27, 444.
On 31 October 2018, the Applicant lodged a Notice of Objection to the Amended Assessments and the Penalty Assessments.[37]
[37] Exhibit R1, T28, 428.
On 6 March 2019 the Respondent notified the Applicant that the objection in respect of its Amended Assessments for the relevant years would be disallowed.[38]
[38] Exhibit R1, T30, 450.
On 20 September 2021 the Respondent notified the Applicant that the objection in respect of its Penalty Assessments for the relevant years would be disallowed.[39]
Applications for Review
[39] Exhibit R1, ST7, 497.
On 19 May 2020, the Applicant lodged a review application with the Tribunal for review of the objection decision dated 6 March 2019 relating to the Amended Assessments.[40]
[40] Exhibit R1, T1, 40.
On 14 October 2021 the Applicant lodged an application with the Tribunal for review of the objection decision dated 20 September 2021 relating to Penalty Assessments.[41]
SUBMISSIONS
[41] Exhibit R1, ST5, 478.
Applicant
If a property is leased to relatives at less than commercial rent, the rent is assessable income. It does not follow that losses and outgoings are wholly deductible. This will depend on the purposes of the taxpayer in acquiring the property and leasing it to relatives.[42]
[42] Exhibit R1, Applicant’s submissions dated 8 April 2021, 544.
In FCT v Kowal,[43] the Court found that the taxpayer had two purposes or objects in mind in acquiring the relevant property. One was to provide his mother with a good home at a moderate cost. The other was to earn assessable income. The Court found that the predominant purpose of the rental arrangement was to earn assessable income, and it allowed deductions for 80% of the losses and outgoings.[44] In FCT v Groser,[45] the Court found that if the weekly rent had been assessable income, it would have allowed no more than $104 by way of deduction for reason that private or domestic purposes for the expenditure predominated over the purpose of producing assessable income. In Bocaz and Commissioner or Taxation,[46] the taxpayer rented out a property to her ex-husband at below market value at the date of the audit. The Tribunal held that the rental agreement was not a non-commercial arrangement but one that was commercially advantageous to the taxpayer.[47]
[43] FCT v Kowal (1983) 79 FLR 75.
[44] Exhibit R1, Applicant’s submissions dated 8 April 2021, 543.
[45] FCT V Groser (1982) 13 ATR 445.
[46] [2012] AATA 847.
[47] Exhibit R1, Applicant’s submissions dated 8 April 2021, 542.
The Applicant’s primary focus in renting the property to Mr Daouk was to generate assessable income as she was out of work and had no other income. Due to their prior relationship, she was lenient and allowed Mr Daouk to pay rent whenever he could, but she still kept track of arrears. Her predominant purpose in incurring expenses was to gain or produce assessable income, which would, over the years, exceed the outgoings and produce a profit.[48]
[48] Exhibit R1, Applicant’s submissions dated 8 April 2021, 543.
Decisions in these cases ultimately depend on the facts of each case. In these circumstances, and as a working rule, income tax deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received. Whether any additional deduction is to be allowed will depend upon the nature of any further information provided by the taxpayer.[49]
[49] Exhibit R1, Applicant’s submissions dated 8 April 2021, 544.
The Applicant had a unique situation and was not educated or experienced with any kind of investment. She intended to acquire assessable income and claim rental deductions so as to minimise her rental losses. These confirm her eligibility to claim rental deductions in full. She entered into the tenancy agreement primarily for income, despite her relationship with the tenant.[50]
[50] Exhibit R1, Applicant’s submissions dated 8 April 2021, 545.
The Applicant requests the Tribunal reinstate in full the rental expenses as per the original returns for the relevant years and, where applicable, remit all penalties imposed.[51]
Respondent
[51] Ibid.
Deduction of losses and outgoings
The Respondent contends that the Applicant only intended to derive income to the extent that she needed to meet her mortgage repayments. It was prudent for the Applicant to let the property to Mr Daouk so they could maintain a proximate relationship to support their attempt to reconcile their relationship. This illustrates that the losses and outgoings incurred in excess of the rental income derived from letting the property were not “necessarily incurred in” gaining or producing assessable income as required under s 8-1(1)(a) of the ITAA.[52]
[52] Exhibit R1, Respondent’s submissions at [37].
Alternatively, the Respondent submits that the outgoings in excess of rental income were of a private or domestic nature such that s 8-1(2)(b) of the ITAA precludes them from being wholly deductible. The Respondent contends that the rental income received by the Applicant was at less than market rates and was not on commercial terms, and there was a private and domestic nature to the transaction.[53] The tenancy agreement had dual purposes. One was an attempt to derive assessable income and there were other purposes associated with the nature of the couple’s relationship and their attempts to reconcile.[54] The Respondent contends that the appropriate apportionment of deductions to be allowed is an amount equivalent to the amount of rent declared in each of the relevant years. This accords with the private and domestic nature of the tenancy agreement.[55]
[53] Transcript, 50.
[54] Ibid.
[55] Exhibit R1, Respondent’s submissions at [43].
Administrative penalty
The Respondent contends that in each of the relevant years, the Applicant and/or her tax agent made a statement to the Respondent that was false or misleading in a material particular. Specifically, the Applicant included:
a)capital allowances for post-acquisition capital works which were never carried out;
b)interest expenses she had not incurred or has not been able to substantiate; and
c)other rental deductions which she had not incurred or has not been able to substantiate.[56]
[56] Exhibit R1, Respondent’s submissions at [50].
The Respondent further contends that the Applicant and/or her tax agent failed to take reasonable care and was reckless in complying with a taxation law by reason of matters including (but not limited to) the following:
a)the Applicant had owned the property since September 2010, and she should have known what expenses she had incurred and when she incurred any such expenses related to the property;
b)the Applicant and or her tax agent should have known Mr Daouk’s status as her husband (whether they were separated or not) was a relevant fact that should have been brought to the Respondent’s attention;
c)the Applicant’s tax agent was an experienced professional firm that would be expected to have a level of tax knowledge and expertise above that of an ordinary person; and
d)70% of rental deductions in the 2016 income year were incorrectly claimed and over 60% of rental deductions claimed in the 2017 income year were incorrectly claimed.[57] This represents a not insignificant amount of expenses for which the Applicant has been unable to produce documentation to substantiate she has incurred, and she has conceded she is not entitled to claim deductions. The failure to identify the error of including them in her income tax returns in the relevant years is demonstrated recklessness on both the Applicant and tax agent’s part.[58]
[57] Exhibit R1, Respondent’s submissions at [51].
[58] Ibid.
The Applicant was specifically notified to review her taxation affairs and given the opportunity to make a voluntary disclosure when she was first advised she was being audited in November 2017.[59] Yet the Applicant and her tax agent provided the Respondent invoices which were incorrectly dated and/or were not relevant, and gave incorrect information in responding to the Rental Property Questionnaire including:
a)stating Mr Daouk was a tenant from 2011;
b)in responding “No” to the question “Did you or anyone associated with you live in the property during the income year?”;
c)in failing to inform the Respondent in the Rental Property Questionnaire that Mr Daouk was the Applicant’s husband;
d)in responding “Yes” to the question “Was the property rented at a commercial rate” and providing the explanation that the commercial rate was decided on the basis it was “similar to units in the same strata”.[60]
[59] Exhibit R1, Respondent’s submissions at [58].
[60] Ibid.
It was only after the Respondent’s representatives raised concerns with the Applicant’s rental depreciation expenses during a formal interview in June 2018 that the Applicant made a disclosure in June 2018 conceding these depreciation expenses and all expenses relating to NJR, which is a related entity of the Applicant. The Applicant could not provide an explanation as to why invoices dated during the relevant years had been provided to the Respondent when the supplier of these invoices (NJR) had been deregistered in 2013.[61]
[61] Exhibit R1, Respondent’s submissions at [59].
Further, the Applicant and her tax agent failed to reconcile exactly what rental expenses she had incurred and was able to substantiate until well into the current proceedings. No explanation has been provided as to why the Applicant claimed such significant expenses without first having the necessary information or documentation to verify the accuracy of the claims for these expenses. The Applicant and her tax agent’s decision to proceed to lodge income tax returns with claims for substantial rental deductions without proper substantiation or verification for the amounts of expenses claimed was reckless.[62]
[62] Exhibit R1, Respondent’s submissions at [60].
Accordingly, the Applicant is liable to an administrative penalty pursuant to s 284-75(1) of Schedule 1 to the TAA imposed at a rate of 50% of the shortfall amount pursuant to item 2 of s 284-90(1) of Schedule 1 to the TAA.[63]
[63] Exhibit R1, Respondent’s submissions at [52].
‘Safe harbour’
The Respondent contends that the Applicant does not satisfy the “safe harbour” provisions under s 284-75(6) of Schedule 1 to the TAA as:
a)the Applicant has failed to prove that she gave all relevant taxation information to her tax agent; and/or
b)the false or misleading nature of the statement(s) also resulted from recklessness by the Applicant’s tax agent as to the operation of a taxation law.[64]
[64] Exhibit R1, Respondent’s submissions at [53].
Remission of penalties
The Respondent contends there are no grounds for remission (in full or in part) under s 298-20 of Schedule 1 to the TAA in respect of penalties applied against shortfalls relating to the claims for rental deductions in the relevant years.[65] The Applicant’s and tax agent’s continuing recklessness throughout the course of the objection process indicates remission is not warranted.[66]
CONSIDERATION AND REASONS
[65] Exhibit R1, Respondent’s submissions at [56].
[66] Exhibit R1, Respondent’s submissions at [57].
Burden and standard of proof
The Applicant has the burden of proving that the Reviewable Decisions should not have been made or that they should have been made differently.[67] Discharging the burden of proof requires the Applicant to establish the facts upon which she relies and, if it is necessary for the Applicant to establish a particular fact in order to displace the Respondent’s decision, the Applicant must satisfy the Tribunal with respect to that fact.[68]
[67] Subparagraph 14ZZK(b)(ii) TAA.
[68] Hua-Aus Pty Ltd v Commissioner of Taxation (2010) 184 FCR 430 at [22] citing Danmark Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333 at 337.
In Federal Commissioner of Taxation v Dalco,[69] Brennan J stated:
the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection.[70]
[69] [1990] HCA 3.
[70] At [14].
Similarly, in Gauci v Federal Commissioner of Taxation,[71] Mason J, as he then was, noted:
The Taxation Act does not place any onus on the Commissioner to show that assessments were correctly made, nor is there any statutory requirement that the assessments should be sustained or supported by evidence. Consequently, unless the appellant shows by evidence that the assessment is incorrect, it will prevail.[72]
[71] [1975] 135 CLR 81.
[72] At 89.
In Trautwein v Federal Commissioner of Taxation,[73] Latham CJ stated that the taxpayer must, at least as a general rule, go further and show not only that the statement is wrong, but also positively show what correction should be made in order to make the assessment correct.[74] The Respondent is entitled to put the Applicant to proof of any or all facts relevant to the issue of an assessment being excessive or otherwise incorrect: Sivai v Commissioner of Taxation.[75]
[73] [1936] HCA 77.
[74] At [2].
[75] [2021] SCA 1253 at [72].
The standard of proof is the balance of probabilities.[76] It has been described as involving a weighing up of the arguments of each party so that if a taxpayer succeeds in ‘weighing down the scales ever so slightly in [its] favour’ then it will have discharged the burden.[77] The taxpayer can discharge the burden in any one of several ways. For example, it can do so by direct evidence and/or by drawing inferences from the evidence,[78] but not from conjecture.[79] While evidence from a taxpayer is not prima facie unacceptable, uncorroborated, self-serving statements are to be tested closely and received with the greatest caution.[80] Importantly, there is no onus on the Respondent to show that an assessment or, in this case, an objection decision, is correct.[81] Therefore, the Applicant cannot succeed merely by identifying errors or flaws in the Respondent’s decision.
1) Are the losses and outgoings incurred by the Applicant for her rental property deductible under s 8-1(1)(a) of the ITAA?
[76] McCormack v Commissioner of Taxation (1979) 143 CLR 284 (‘McCormack’) at 303.
[77] Commissioner of Taxation v Cassaniti (2018) 266 FCR 385 at 409, [88] per Steward J.
[78] McCormack at 323 per Murphy J and at 303 per Gibbs J.
[79] Rawson Finances Pty Ltd v Federal Commissioner of Taxation (2013) 93 ATR 775 at [88] per Jagot J.
[80] McCormack at 302 per Gibbs J; Imperial Bottleshops Pty Ltd and Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148 at 155.
[81] McCormack at 303-304 citing Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81.
The characterisation of an outgoing for the purposes of s 8-1 of the ITAA is a question of fact to be determined by reference to all the circumstances surrounding its incurrence, including what the expenditure was for and what it was intended to achieve.[82] In order to be incurred in gaining or producing assessable income, “it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income, or, if none be produced, would be expected to produce assessable income”.[83]
[82] Exhibit R1, Respondent’s submissions at [31].
[83] Exhibit R1, Respondent’s submissions at [32] citing Ronpibon Tin NL v Commissioner of Taxation (Cth) (1949) 78 CLR 47 at 57 per Latham CJ, Rich, Dixon, McTiernan and Webb JJ.
The Applicant reported rental income of $12,000 and $12,200 received from Mr Daouk in the relevant years. The Applicant claimed interest expenses in the relevant years of $11,900 and $13,600 respectively. The actual outgoings for the property were $13,281.90 and $16,077.15.[84] The issue for determination by the Tribunal is whether all or part of the outgoings in excess of the rental income are deductible.
[84] Exhibit R1, Schedule A Respondent’s submissions, 35.
The Applicant’s evidence is that she purchased the property with the intention of residing there which she did following the settlement in September 2010. Following her marriage to Mr Daouk in August 2015 they lived together at the property. When they experienced marital problems, the Applicant returned to live at the parents’ house, and she rented the property to Mr Daouk. It was her intention to resume living with Mr Daouk once they had resolved their marital problems.
Based on the evidence before it, the Tribunal finds that the losses and outgoings incurred by the Applicant in excess of the rental income derived from letting the property were not “necessarily incurred in” gaining or producing assessable income.[85] It is evident that the Applicant rented the property to Mr Daouk so that he would have a place to live in close proximity to her which would facilitate their attempt to reconcile their relationship. The rent paid by Mr Daouk was sufficient to cover the Applicant’s mortgage repayments and was not intended to gain or produce assessable income. It follows that the losses and outgoings incurred by the Applicant in excess of the rental income derived from letting the property were not “necessarily incurred in” gaining or producing assessable income.
[85] Exhibit R1, Respondent’s submissions at [37].
Accordingly, the Tribunal finds that the losses and outgoings incurred by the Applicant in excess of the rental income she received pursuant to the tenancy agreement are not deductible under s 8-1(1)(a) of the ITAA.
2) Is the Applicant excluded from deducting these expenses in part as they are a loss or outgoing of a private or domestic nature under s 8-1(2)(b) of the ITAA?
Having made the above finding, it is not necessary for the Tribunal to consider whether the expenses are not deductible in full or in part under s 8-1(2)(b) of the ITAA as they are of a private or domestic nature. However, for completeness, the Tribunal has considered this issue having regard to the relevant policy and authorities and makes the following findings.
The authorities recognise that expenses incurred in gaining or producing rental income pursuant to an arm’s length agreement are allowable deductions.[86] However, where an agreement is not arm’s length, the taxpayer must demonstrate the terms of the agreement were on commercial terms.[87] In the Applicant’s circumstances, she leased her property to Mr Daouk who at all relevant times was her husband.
[86] Commissioner of Taxation v Janmoor Nominees Pty Ltd (1987) 15 FCR 348.
[87] Taxation Ruling IT 2167 Income Tax: rental properties – non-economic rental, holiday home, share of residence, etc [13]
Taxation Ruling IT 2167 Income Tax: rental properties – non-economic rental, holiday home, share of residence, etc (‘TR 2167’) relevantly states:
Letting of property to relatives
13Where property is let to relatives the essential question for decision is whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purpose from any other owner in a comparable arms’ length situation.
14If property is let to relatives at less than commercial rent other considerations arise. Unless the arrangements are comparable to those in FCT v Groser … the rent would represent assessable income. It would not necessarily follow, however, that losses and outgoings in relation to the property would be wholly deductible. The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting out to relatives.
…
16… decisions in these cases will ultimately depend upon the facts of each case. As a matter of experience it is unlikely that there will be sufficient information provided in return forms to enable a final decision to be made. In these circumstances, and as a working rule, income tax deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received. Whether any additional deduction is to be allowed will depend upon the nature of any further information provided by the taxpayer.
While policy guidelines are not binding law, there is an extensive body of case law that recognises the desirability for decision-makers to make consistent decisions, and that consistency in decision-making is facilitated by the existence of policy guidelines: Re Drake and Minister for Immigration and Ethnic Affairs (No 2).[88] In M64/2015 v Minister for Immigration and Border Protection the High Court stated:[89]
Policy guidelines... promote values of consistency and rationality in decision-making, and the principle that administrative decision-makers should treat like cases alike. In particular, policies or guidelines may help to promote consistency in “high volume decision-making”. Thus in Re Drake and Minister for Immigration and Ethnic Affairs (No 2), Brennan J, as President of the Administrative Appeals Tribunal, said that “[n]ot only is it lawful for the Minister to form a guiding policy; its promulgation is desirable” because the adoption of a guiding policy serves, among other things, to assure the integrity of administrative decision-making by “diminishing the importance of individual predilection” and “the inconsistencies which might otherwise appear in a series of decisions”.
[88] (1979) 2 ALD 634 at 642.
[89] (2015) 258 CLR 173 at [54].
This approach has been endorsed by the Federal Court in the context of the statutory power to release a taxpayer from a taxation debt. In Corlette v McKenzie,[90] Beazley J (as her Excellency then was), found that the Board was entitled to apply a policy to its decision-making, so long as it did not do so inflexibly. This approach has also been adopted in Tribunal decisions, for example, Schweitzer,[91] GSJW,[92] and Burns and Commissioner of Taxation.[93] The Tribunal finds that it is appropriate to have regard to policy in this review application.
[90] (1995) 62 FCR 584 at 595-596. Affirmed by the Full Federal Court (1996) 62 FCR 597.
[91] Schweitzer and Commissioner of Taxation (Taxation) [2019] AATA 1100 at [104]-[109] and [118].
[92] GSJW and Commissioner of Taxation (Taxation) [2019] AATA 5170 at [56].
[93] [2019] AATA 3860 at [28].
Was the tenancy agreement consistent with commercial practices?
Having regard to the factors outlined in TR2167, the Tribunal finds for the following reasons that the tenancy agreement between the Applicant and Mr Daouk was not consistent with commercial practices.
Based on the total rental income declared by the Applicant, Mr Daouk paid, on average, a weekly rental of $229 in the 2016 income year and $262 in the 2017 income year.[94] A rental comparison report provided by the Respondent shows that during the relevant periods the lowest rent for a comparable property with three bedrooms, two bathrooms and one carport in the area was $450 per week.[95] To support her claim that the property was leased at market rate, the Applicant relied on a rental property which had a starting rental price of $320 per week.[96] This property consists of two bedrooms, one bathroom and one carport. Although the rent for this property was higher than the rent paid by Mr Daouk for the Applicant’s property, it consists of one less bedroom and one less bathroom.
[94] Rounding to the nearest dollar.
[95] A number of other similar properties were listed for rent during the relevant years as seen in the RP Data rental comparison report. A 3 bedroom 2 bathroom property situated at Old Kent Road Greenacre NSW 2190 was advertised on 29 April 2016 for $550/w. It was on the market for 8 days. A 3 bedroom 2 bathroom property situated at Gosling Street Greenacre NSW 2190 was advertised on 24 March 2017 for $660/w. It was on the market for 25 days: ST5-48
[96] Exhibit R1, T29, 442.
Based on the evidence before it, the Tribunal finds that the rental income received by the Applicant during the relevant years was well below market rate and significantly below that of an arm’s length market value. The non-commercial nature of the tenancy agreement is further demonstrated by the absence of the following that would normally exist in an arm’s length arrangement including:
·No tenancy agreement was lodged with NSW Fair Trading;
·No rental bond was lodged with NSW Fair Trading;
·No contemporaneous documentation relating to the tenancy agreement or agreed terms exists; and
·No contemporaneous documentation relating late or unpaid amounts of rent exists.
Based on the evidence before it and for the reasons outlined above, the Tribunal finds that the Applicant has failed to demonstrate that the property was rented to Mr Daouk pursuant to an arm’s length agreement on commercial terms.
What were the Applicant’s purposes in letting the property to Mr Daouk?
Having found that the tenancy agreement was not consistent with commercial practices, the Tribunal has considered the other factors in TR 2167 to determine whether the losses and outgoings in relation to the property are wholly or in part deductible.
The Respondent contends that the tenancy agreement between the Applicant and Mr Daouk was of a familial nature of the kind described in the decisions of Federal Commissioner of Taxation v Groser (‘Groser’),[97] Federal Commissioner of Taxation v Kowal (‘Kowal’),[98] and Madigan v Commissioner of Taxation (‘Madigan’),[99] such that the Tribunal should, if possible, apportion the losses and outgoings in connection with the rental property to reflect the dual purpose of earning assessable income and the private and domestic nature of the tenancy agreement.
[97] (1982) 65 FLR 121.
[98] (1983) 79 FLR 75.
[99] (1996) 68 FCR 12.
In Groser, the taxpayer let property to his elderly parents and his disabled brother at below market rate rent. Justice Jenkinson found that the only reason rent receipts were accepted from his family was as contributions to the maintenance of the property. His Honour observed that where outgoings exceed the assessable income and the assessable income is grossly undervalued, an apportionment of outgoings should be made between what could be regarded as incurred in gaining or producing that rent and what could not be so regarded. However, on the facts of that case, Jenkinson J found that the $2 per week amount received was in fact not assessable income and disallowed all the deductions. This was for reason that His Honour concluded that the arrangements involved the care of the taxpayer’s brother, and that this private arrangement explained the receipts. His Honour held that the weekly amounts of $2 were a contribution to the funds out of which the taxpayer would defray expenses for caring for his brother and did not constitute assessable income.[100]
[100] At 125.
In Kowal, the property was rented to the taxpayer’s mother for $10 per week when the commercial rent was $50 per week. An apportionment of the outgoings was ordered so that 80 per cent for the outgoings were found to have the characteristic of being incurred for earning assessable income. The Court found that although one of the taxpayer’s purposes in acquiring the property was to give his mother a home in which to reside at a moderate non-commercial rental, it was clear that the taxpayer’s predominant purpose in incurring the expenses was to gain or produce assessable income in the form of rent which would, over the years, exceed the outgoings and produce a profit.[101]
[101] At 134-135.
In Madigan, the taxpayer was a beneficiary under a family trust, the trustee of which leased trust property to the taxpayer’s father at a rate which was approximately 25 per cent of the market rate. In calculating the net income of the trust estate, the trustee sought to deduct all of the expenses in respect of the property. Hill J held that it was appropriate to apportion the expenses. His Honour found that one purpose was to provide a benefit in the form of accommodation to the taxpayer’s father. The other purpose was to obtain assessable income in the amount of $7,800 per annum. His Honour stated:[102]
Matters of motivation or purpose will generally be irrelevant in determining the characterisation of an outgoing. But where the circumstances are such that the outgoings in question are considerably in excess of the assessable income derived, and furthermore it is known that the assessable income derived is but a small fraction of an arm’s length assessable income, it will be necessary to consider the facts further to determine whether the outgoings in question are properly to be characterised as expenditure incurred wholly in gaining or producing assessable income or whether the expenditure in part should be characterised differently.
[102] At 17.
After referring to Groser and Kowal, Hill J concluded:[103]
The mere fact that the rental is thus below market rental will not preclude deductibility of the whole of the outgoings. But where the circumstances are such that the explanation for the low rent lies in the private relationship which the parties occupying the premises have to the trustee, it is not possible to say that the whole of the outgoings have the character of outgoings incurred in gaining or producing assessable income. The explanation is to be found rather in private or non-income earning considerations.
[103] At 18.
His Honour considered that the only explanation for the arrangement was to be found in the relationship between those occupying the property on the one hand and the trustee on the other.[104] It was therefore appropriate to apportion the deductions to recognise that 80 per cent were for the purpose of producing assessable income and 20 per cent were for the purpose of private and domestic usage.[105]
[104] At 16 [G].
[105] At 18 [E].
Based on the evidence before it, the Tribunal finds that the tenancy agreement that the Applicant entered into with Mr Daouk whilst they were separated and attempting to address their marital problems was of a familial nature of the kind described in Groser and Madigan. The Applicant’s decision to let the property to Mr Daouk on the terms contained in the tenancy agreement can only be explained by the familial relationship that existed between them. Mr Daouk travelled to Australia on a partner visa sponsored by the Applicant. The intention was that they would marry and reside together at the property. If not for Mr Daouk’s gambling problems, the Applicant and Mr Daouk would have occupied the property as their primary residence after they were married. The Applicant only resided at the parents’ home on a temporary basis whilst she and Mr Daouk attempted to resolve their marital problems. It was convenient for both the Applicant and Mr Daouk for him to live in the property, which was opposite the parents’ house, whilst they attempted to reconcile their relationship.
Accordingly, the Tribunal find that, as in Madigan, the explanation for the low rent paid by Mr Daouk lies in the familial and domestic relationship between him and the Applicant. The determination of the rent payable under the tenancy agreement was based on private or non-income earning considerations. As a consequence, the whole of the outgoings for the property cannot be said to have the character of expenses incurred in gaining or producing assessable income.
The Applicant relies on Bocaz v Commissioner of Taxation (‘Bocaz’)[106] to support her contention that the tenancy agreement was not of a private or domestic nature.[107] In Bocaz the taxpayer leased her property to her ex-husband for $200 per week and did not increase the rent for a period of eight years such that the rent paid was less than the market rate. The Court relevantly found that the tenant undertook renovations to the property which justified the lower than commercial rent paid by him:
Ms Bocaz was prepared to rent the Barber Avenue Property to her ex-husband for $200 per week, because of the agreement she had with him as to the renovations when he moved in, which was at a time when the condition of the property was very poor. She elected not to increase the rent over the period, in part, because of the fact that he had fixed the Barber Avenue Property and maintained it since 2000.[108]
[106] [2012] AATA 847.
[107] Exhibit R1, T1, 48.
[108] at [37].
The Applicant’s evidence is that there were only some minor repairs or renovations to the property during the relevant years. While she was unable to say who conducted those renovations, she agreed they were not done by Mr Daouk. Accordingly, in contrast to the facts in Bocaz, there is no evidence that Mr Daouk undertook any additional services or repairs to the property so as to warrant a lower rental rate.
Based on the evidence before it, the Tribunal finds that the rent payable under the tenancy agreement was based on private or non-income earning considerations, and therefore the whole of the losses and outgoings in connection with the rental property cannot be said to have the character of those incurred in gaining or producing assessable income.
What is the appropriate apportionment?
The Applicant’s evidence is unclear as to how often she was living at the property during the relevant period while she and Mr Daouk were attempting to reconcile. Accordingly, it is very difficult to determine an appropriate apportionment of the losses and outgoings. The Applicant acknowledges and the Respondent accepts that if there is insufficient information to enable a final decision, the working rule suggested in TR 2167 should be applied. This allows income tax deductions for losses and outgoings incurred in connection with the rental property to be allowed up to the amount of rental income that has been substantiated. The result of the application of this working rule is that there would be a net rental income of zero, which would result in no change to the current assessments as determined under the audit and objection decisions.
Based on the evidence before it and applying the working rule suggested in TR 2167, the Tribunal finds that the deductions for losses and outgoings incurred by the Applicant in connection with the rental property be allowed up to the amount of the rental income in the relevant years as outlined in paragraphs [25] and [26] above.
3) What administrative penalty is to be imposed on the Applicant under s 284-75 of Schedule 1 to the TAA?
The Respondent issued Penalty Assessments for each of the relevant years at the rate of 50% for recklessness.[109] The Tribunal has considered whether these penalties are appropriate in the Applicant’s circumstances and makes the following findings.
[109] Exhibit R1, T26, 440; T27, 444.
The meaning of “recklessness” was discussed by the Full Federal Court in Hart v Commissioner of Taxation.[110] Justices Hill and Hely explained:[111]
Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective.
[110] [2003] FCAFC 105; (2003) 131 FCR 203.
[111] at [43].
Their Honours went on to quote from the judgment of Cooper J in BRK (Bris) Pty Ltd v Commissioner of Taxation,[112] where is His Honour opined:[113]
Recklessness in this context means to include in a tax statement material upon which the ITAA 1936 or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the ITAA 1936 and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.
[112] (2001) 46 ATR 347.
[113] at [77].
In Re Abichandani v Commissioner of Taxation[114], the Tribunal observed:[115]
The question of recklessness is to be considered in all the circumstances. The question is whether an ordinary person would describe the conduct as reckless; in particular the question is did the taxpayer knowing the true position and the real risks involved, simply take ‘the punt’ that she, he or they might get away with it or simply not care whether she, he or they would in fact get away with it.
[114] [2019] AATA 4296.
[115] at [71].
The evidence before the Tribunal is that the Applicant was notified by the Respondent to review her taxation affairs and was given the opportunity to make a voluntary disclosure when she was advised she was being audited in November 2017. The Applicant and her tax agent continued to provide the Respondent with invoices which were incorrectly dated and/or were not relevant, and gave the Respondent incorrect information, including that outlined in [47] above. In June 2018, following a formal interview with the Respondent’s representatives, the Applicant made a voluntary disclosure conceding the claimed depreciation expenses and all the expenses she claimed to have incurred with NJR. The Applicant did not provide an explanation as to why NJR invoices dated during the relevant years had been provided to the Respondent when NJR had been deregistered in 2013. Further, when audited the Applicant provided the invoices from NJR, which apparently had incorrect dates on them. It is unclear why the invoices were provided given that they did not relate to the tax period in question. If they had been correctly dated, they would have been issued at a time when NJR was deregistered indicating that the invoices were in fact false.
The Applicant and her tax agent were unable to identify and substantiate the rental expenses incurred until well into the current review process. At no stage have the Applicant or her tax agent provided an explanation as to why these substantial rental expenses were claimed without information or documentation to verify their accuracy. During cross-examination the Applicant was taken to her tax return and then to the various documents that supported the deductions that were claimed. These claimed deductions included body corporate fees and interest deductions well in excess of the amounts that were actually incurred. In addition, the Applicant agreed that the CBA Loan account was redrawn for purposes other than maintaining the property, which would have further reduced her entitlement to claim those interest deductions. The Applicant was unable to provide any reasonable explanation for these significant discrepancies.
Based on the evidence before it and having regard to the authorities, the Tribunal finds that the Applicant’s decision to lodge income tax returns which included these rental expenses without proper substantiation or verification for the amounts of expenses claimed was reckless. The Applicant included in her tax return claims for deductions knowing that there was a real, as opposed to a fanciful, risk that the information on which these were based was incorrect. It further finds that a reasonable person in the position of the Applicant would have seen there was a real risk that this may in turn lead to an incorrect assessment by the Respondent of her tax liability.
Accordingly, the Tribunal is satisfied that the Applicant’s conduct involved more than mere negligence and amounted to gross carelessness. Accordingly, the Tribunal is satisfied that the Applicant is liable to pay the administrative penalty applied under s 284-75(1)(b) of the TAA.
‘Safe Harbour’
The Tribunal has considered whether the Applicant has established the ‘safe harbour’ exception contained in s 284-75(6) of Sch 1 to the TAA. It requires that the Applicant provided her registered tax agent with all relevant information, the tax agent made the statement, and the false or misleading nature of the statement did not result from intentional disregard or recklessness by the agent as to the operation of a taxation law. The Applicant bears the evidential onus of establishing that she gave her tax agent all relevant taxation information: s 284-75(7). The Respondent contends that this exception does not apply as it is clear that the Applicant did not give her tax agent all relevant information, and therefore she has failed to discharge the onus on her under this section.
Based on the evidence before it, the Tribunal finds there is insufficient evidence for the Applicant to demonstrate that she gave her tax agent all relevant information with respect to the claimed deductions. Accordingly, it finds that she has not established the ‘safe harbour’ exception contained in s 284-75(6) of Sch 1 to the TAA.
4) Should the administrative penalty be remitted pursuant to s 298-20(1) of Schedule 1 to the TAA?
The Tribunal has considered whether there are any mitigating circumstances that applied at the time the Applicant lodged her tax returns which would warrant remission of penalties under s 298-20 of Sch 1 to the TAA.
The discretion under section 298-20 of the TAA is a broad one. In Sanctuary Lakes Pty Ltd v Commissioner of Taxation (‘Sanctuary Lakes’),[116] the Full Federal Court explained that whether a penalty should be remitted depends on whether the Respondent, and the Tribunal on review, is satisfied, having regard to the taxpayer’s particular circumstances, that it is appropriate to remit the penalty in whole or in part. Harshness of the penalty is not the relevant test, although it may be a factor. Justice Griffiths stated:[117]
It may be appropriate in a particular case to remit a penalty on the basis that the outcome otherwise could be described as “harsh”, but that does not mean that “harshness” should be elevated to an essential element in determining whether or not to remit the penalty under s 298-20.
In my opinion the correct question which arises under s 298-20 should not be expressed in terms of “harshness”. Rather, the question 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. For example, a decision-maker might determine that it is appropriate to remit penalty in whole or in part, because otherwise the outcome for a particular taxpayer would be unreasonable or unjust (and therefore inappropriate), as opposed to harsh ... In my view, there is no warrant for confining the otherwise broad discretion in s 298-20 to circumstances where the outcome of imposing administrative penalty would otherwise be “harsh”.
[116] (2013) 212 FCR 483.
[117] at [248] and [249].
His Honour endorsed the proposition that: ‘there need to be circumstances that could be regarded as mitigating the applicant’s behaviour in some way.’[118]
[118] at [273] and [274].
The discretion under section 298-20(1) of the TAA is not limited by any explicit conditions or factors. The relevant factors are to be determined by implication from the subject matter, scope and purpose of the legislation: RePicton Finance Ltd v Federal Commissioner of Taxation.[119] In ReYazbek and Commissioner of Taxation,[120] Deputy President Deutsch listed a number of factors that are relevant to the exercise of the discretion, including the taxpayer’s personal circumstances.[121] He emphasised that ‘[i]t is clear that it is for the taxpayers to spell out in detail the exact circumstances that would justify a full remission of the penalty pursuant to this section’.[122]
[119] (2013) 93 ATR 876 at [108]–[115].
[120] [2014] AATA 423.
[121] at [106].
[122] at [107] citing Re Coppell v Federal Commissioner of Taxation (2000) 44 ATR 1001 at [6]–[7].
The legislative scheme for imposition of a penalty introduced to the TAA was described by Deputy President O’Loughlin QC in ReDiarra and Commissioner of Taxation,[123] citing Griffiths J in Sanctuary Lakes.[124] A uniform system of penalties was introduced which:
(a)provided a generic and uniform system of penalties in which decisions are reviewable;
(a)sought to treat taxpayers in like circumstances consistently;
(b)considered taxpayer circumstances and compliance history;
(c)tailored the penalty to secure compliance improvements; and
(d)allowed remission where taxpayers and their agents make a genuine attempt to meet their obligations, but will maintain an appropriate level of penalty where taxpayers don’t make an effort to do the right thing.
(Emphasis added.)
[123] ReDiarra and Commissioner of Taxation [2019] AATA 5545 at [37].
[124] at paragraphs [263]–[266].
In exercising this discretion, the Tribunal must decide:[125]
whether it is appropriate, in all of the circumstances, to remit the penalty in whole or in part, for example where the imposition of penalties would produce an unjust or unreasonable outcome in the circumstances of the case. In exercising this discretion, the Tribunal is to take into account the purpose of the penalty regime being to deter infringement where tax-payers are required to self-assess their tax obligations.
(Citations omitted.)
[125] ReDiarra and Commissioner of Taxation at [39].
Applying these principles to the Applicant’s particular circumstances, the Tribunal finds, for the reasons that follow, that it is appropriate to remit the penalty by 25%.
On the basis of the evidence before it, the Tribunal finds that the Applicant was guided by the misleading and inaccurate advice provided to her by her tax agent and members of her family in relation to the decisions she made to lease her property to Mr Daouk at a non-commercial rent, and to claim deductions in her tax return for outgoings she did not actually incur. The Tribunal finds that the Applicant made a genuine attempt to meet her tax obligations and made an effort to ‘do the right thing’, despite recklessly including false and misleading statements in her tax return and making claims for deductions for which she was not entitled.
Accordingly, the Tribunal finds that in the Applicant’s particular circumstances it is appropriate to exercise its discretion under s 298-20(1) of the TAA to remit the penalty by 25%.
CONCLUSION
The Tribunal is not satisfied that the Applicant has discharged the onus on her under s 14ZZK of the TAA to demonstrate that the Respondent’s Amended Assessments and the Penalty Assessments for the relevant years are excessive or otherwise incorrect.
The Tribunal is satisfied that it is appropriate, in the Applicant’s particular circumstances, to exercise its discretion under s 298-20(1) of the TAA to remit the administrative penalty by 25%.
DECISION
The Tribunal varies the Reviewable Decisions to exercise the discretion under s 298-20(1) of the TAA to remit the administrative penalty by 25%. The Reviewable Decisions are otherwise unchanged.
I certify that the preceding 109 (one hundred and nine) paragraphs are a true copy of the reasons for the decision herein of Senior Member Dr Linda Kirk
.................................[SGD].......................................
Associate
Dated: 16 September 2022
Date(s) of hearing: 10 & 19 May 2022 Date final submissions received: 26 May 2022 Advocate for the Applicant: Mr H George, HS & Associates Solicitors for the Respondent: Mr V Nellailingam, Australian Taxation Office
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