Robert Nash and Commissioner of Taxation
[2012] AATA 719
•17 October 2012
[2012] AATA 719
Division TAXATION APPEALS DIVISION File Numbers
2010/2053-2060
Re
Robert Nash
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Professor R Deutsch, Deputy President
Date 17 October 2012 Place Sydney The Tribunal sets aside the decision under review to disallow the deductions for GIC accrued amounts in the years to which the GIC is referable, and substitutes a decision that the Applicant is entitled to deductions for the GIC accrued amounts for each year to which the GIC is referable as set out in paragraphs 4 and 5 of the reasons below.
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Professor R Deutsch, Deputy President
Catchwords
TAXATION: general interest charge – when general interest charge is due and payable – requirement of a pre-existing liability – liability that is contingent or is pending, threatened or expected is not sufficient – the Commissioner's ability to remit does not affect the incurring of the liability at earlier stage – decision under review is set aside.
Legislation
Income Tax Assessment Act 1936 – s 204
Income Tax Assessment Act 1997 – ss 25, 109Y, 995
Tax Administration Act 1953 – ss 8AAA, 8AAE, 8AAGCases
Commissioner of Taxation v H (2010) 188 FCR 440
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492
Layala Enterprises (in liquidation) v Federal Commissioner of Taxation (1998) 86 FCR 348
New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179
W Neville and Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290REASONS FOR DECISION
Professor R Deutsch, Deputy President
17 October 2012
BACKGROUND
This case is the culmination of a number of years of legal disputation involving the Applicant, a number of members of the Applicant's family and the Australian Taxation Office.
The only relevant matter that is left for finalisation is the question as to the timing of the deduction for the payment of the General Interest Charge (“GIC”) which in relation to this matter, was imposed under former section 204(3) of the Income Tax Assessment Act 1936 (“ITAA 1936”). The basis for the calculation of the GIC was and is set out under Part IIA of the Taxation Administration Act 1953 (“TAA 1953”).
The GIC notices that were issued in this case related to the income years 2003 through to and including 2008. The notices were however all issued in the first six months of the 2008 calendar year, namely:
Date of Notice
GIC
4 January 2008
$145,319.90
26 February 2008
$8,098.40
4 March 2008
$945.75
13 June 2008
$14,045.70
Total $168,409.75
Of these amounts, it is clear that the first amount referred to, namely $145,319.90, is a composite amount covering six years. The GIC referrable to each year is as follows:
Income Year
Referrable GIC
2003
$10,256.29
2004
$19,248.03
2005
$23,994.43
2006
$31,636.90
2007
$38,850.17
2008
$21,334.09
Total
$145,319.90 (rounded)
In addition there are three smaller amounts however, from the documents that are before me, it is not very clear which year they relate to. I assume they are all referrable to the 2008 income year and I have proceeded on that basis. Thus, the total amount referable to the 2008 year is $44,423.94 and the total deduction is $168,409.75.
In these circumstances, the critical issue is whether the full amount of $168,409.75 is a deduction only in the 2008 income year (i.e. the year in which the GIC notices were issued) or whether each amount of GIC in respect of each of the income years from 2003 to 2008 gives rise to a deduction in the year to which the GIC is referrable.
THE STATUTORY FRAMEWORK
Section 25–5(1) of the Income Tax Assessment Act 1997 (“ITAA 1997”) provides specifically that:
You can deduct expenditure you incurred to the extent that it is for:
….
(c) the *general interest charge or the *shortfall interest charge …
Pursuant to section 995–1 ITAA 1997, the GIC is defined as the charge worked out under Part IIA of the TAA 1953.
“Incur” or “incurred” however remains undefined.
Of relevance to the current situation is the previous provision which imposed liability for GIC, namely s 204 of the ITAA 1936. The two critical subsections in s 204 provide as follows:
(1) Subject to the provisions of this Part, the tax payable by a taxpayer other than a full self‑assessment taxpayer for a year of income becomes due and payable:
(a)if the taxpayer’s return of income is lodged on or before the due date for lodgment—on the later of:
(i) 21 days after the due date for lodgment of that return specified in the Gazette under section 161 for the year of income; or
(ii) 21 days after a notice of assessment is given to the taxpayer; or
(b)in any other case—21 days after that due date for lodgment.
…
(3) If any of the tax or shortfall interest charge which a person is liable to pay remains unpaid after the time by which the tax or charge is due to be paid, the person is liable to pay the general interest charge on the unpaid amount for each day in the period that:
(a)started at the beginning of the day by which the tax or shortfall interest charge was due to be paid; and
(b) finishes at the end of the last day on which, at the end of the day, any of the following remains unpaid:
(i) the tax or shortfall interest charge;
general interest charge on any of the tax or shortfall interest charge.
The basis for calculating GIC is set out in sections 8AAA to 8AAG of the TAA 1953.
Section 8AAE is particularly of relevance here. That section relevantly provides that the GIC for a day is due and payable to the Commissioner at the end of that day.
Section 8AAG gives the Commissioner power to remit the GIC in whole or in part under the circumstances set out in subsections (3),(4) or (5) of that section.
ANALYSIS
It is clear from much of the available case law that a loss or outgoing may be incurred in one income year, even if the amount is not actually paid until a subsequent year: see W Neville and Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290; New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 and Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492.
The above cases confirm the broad proposition that, in the absence of any special legislative provision to the contrary, an outgoing is incurred when a taxpayer is definitively committed, or completely subjected, to a particular loss or outgoing. It is not sufficient if there is merely a liability that is contingent on the happening of some future event or is no more than pending, threatened or expected. To use a well-worn phrase, it must be a presently existing liability.
Whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability arises.
According to the statutory framework, the GIC expense is incurred at the time at which the GIC became due and payable by the operation of the relevant tax legislation. From that point, the liability is real and existing and is not merely impending, threatened or expected. It is a requirement of the relevant statute and requires no further imposition or acceptance by the Applicant or the Respondent. The fact that the liability may at some future time be effectively reversed by the Respondent, by opting to remit the GIC under s 8AAG if the circumstances in subsections (3),(4) or (5) were to apply, is of no consequence in relation to the incurring of the original expense. It is true that the ability to remit might at some future point reverse the effect of the pre-existing liability, but that does not detract from the fact that the liability was real and in existence from the time at which the GIC became payable under s 8AAE of the TAA 1953.
This conclusion is reinforced by the fact that the liability to GIC is not imposed by the making of an assessment, but simply arises on a day-by-day basis where tax remains unpaid. The GIC does not spring into action as it were upon the assessment of tax being made. Section 8AAE of the TAA 1953 provides that the GIC for a day is due and payable at the end of each day that tax remains unpaid. The full Federal Court in both Commissioner of Taxation v H (2010) 188 FCR 440 (on appeal from the decision of the Administrative Appeals Tribunal in Re Waffles Pty Ltd v Commissioner of Taxation [2010] AATA 78) and Layala Enterprises (in liquidation) v Federal Commissioner of Taxation (1998) 86 FCR 348, provides support for this conclusion.
The decision in H concerned GIC, but in a slightly different context to the one currently under consideration. In that case, the Court (and the Tribunal beforehand) considered whether the obligation to pay GIC constituted a present legal obligation for the purposes of calculations under s 109Y of the ITAA 1936.
In particular, the full Federal Court noted at 450 that in its reasons the Tribunal had commented that:
… a person’s liability to the GIC accrues on a daily basis as a direct consequence of the fact that tax remains unpaid after the due date.
The Court then noted that in consequence, the Tribunal was of the view that GIC becomes a present legal obligation for the purposes of the calculation in s 109Y(2) on each day on which tax that should have been paid remains unpaid.
The Court at 450 concluded:
The Tribunal’s view of the matter is undoubtedly correct. On the hearing of the appeal the Commissioner pointed to his power of remission of GIC under s 8AAG of the TAA [1953] as being a further impediment to the Tribunal’s view of the matter, but unless and until remitted, the GIC remains a “present legal obligation” on each day on which the tax that should have been paid remains unpaid.
The decision in Layala Enterprises involved a materially different question, namely the timing of the tax deduction that would be allowable for payroll tax liabilities. Nonetheless, the case is an important authority confirming that the liability in question in that case was imposed by the operation of the TAA 1953 and the ITAA 1997, and the liability was not merely impending, threatened or expected. It had been imposed by statute and did not require any other action by the parties such as voluntary acceptance.
Both cases are entirely consistent and supportive of the view that the GIC is incurred at the time when it becomes due and payable.
The decision in H is also supportive of the view that the Commissioner’s ability to remit does not in any way affect the incurring of the liability at an earlier point in time. In my view, the ability of the Commissioner to remit GIC under section 8AAG of the TAA 1953 does not prevent the GIC from being a present legal obligation. Unless and until it is so remitted, the GIC remains a present legal obligation on each and every day on which tax should have been paid. Accordingly, the GIC is incurred and therefore deductible in the year to which it is referrable.
DECISION
The Tribunal sets aside the decision under review to disallow the deductions for GIC accrued amounts in the years to which the GIC is referable, and substitutes a decision that the Applicant is entitled to deductions for the GIC accrued amounts for each year to which the GIC is referable as set out in paragraphs 4 and 5 of the above.
I certify that the preceding 26 (twenty-six) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President.
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Associate
Dated 17 October 2012
Date of Hearing on the Papers 12 September 2012 Date of Decision 17 October 2012
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