Ryvitch and Commissioner of Taxation
[2002] AATA 607
•24 July 2002
DECISION AND REASONS FOR DECISION [2002] AATA 607
ADMINISTRATIVE APPEALS TRIBUNAL Nº VT2001/1047-1048
Nº VT2002/93-96
TAXATION APPEALS DIVISION
Re: HELEN RYVITCH
Applicant
And: COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal: Mr B.H. Pascoe, Senior Member
Date: 24 July 2002
Place: Melbourne
Decision:The Tribunal varies the decisions under review to the extent of remitting additional tax imposed pursuant to s.226G of the Income Tax Assessment Act1936 from 25 per cent to 15 per cent of the tax shortfall in each of the years ended 30 June 1993 to 1998.
Pursuant to regulation 19(7)(b) of the Administrative Appeals Tribunal Regulations, the Tribunal certifies that these proceedings have terminated in a manner favourable to the applicant.
(sgd) B.H. Pascoe
Senior Member
INCOME TAX –additional tax by way of penalty – whether failure to take reasonable care – claims for losses on property dealing – whether circumstances justify remission of part or all of additional tax
Income Tax Assessment Act1936
Ryvitch v Commissioner of Taxation (2001) 47 ATR 381
AAT Case 515 (1989) 30 ATR 3611
Hilton v Federal Commissioner of Taxation (1992) 24 ATR 91
North Ryde RSL Community Club Limited v Federal Commissioner of Taxation
(2002) FCA 313
REASONS FOR DECISION
24 July 2002 Mr B.H. Pascoe, Senior Member
These applications are for the review of decisions of the respondent to disallow objections to assessments and amended assessments for the years ended 30 June 1993 to 1998 inclusive. Initially, objections had been lodged against assessments for the years ended 30 June 1993 to 1996 inclusive and the respondent's disallowance of the objections was the subject of an appeal to the Federal Court. The primary issue in the appeal was the claims for partnership losses in three of the years. A secondary issue was the imposition of additional tax by way of penalty, at the rate of 50 per cent of the tax shortfall. In a decision of Sundberg J in Ryvitch v Commissioner of Taxation (2001) 47 ATR 381, the appeals against the disallowance of the deductions claimed for partnership losses were dismissed and the respondent's decision on penalties was set aside and remitted to the respondent for reconsideration. On 17 September 2001, the respondent issued amended assessments reducing the penalty to 25 per cent. On 26 July 2000, the respondent issued an assessment for the year ended 30 June 1997 and an amended assessment for the year ended 30 June 1998 in which carried forward losses from the earlier years claimed in the relevant returns were disallowed and penalties of 50 per cent imposed. Objections were lodged and allowed to the extent of reducing penalties to 25 per cent on 28 August 2001. As a result, the issue before the Tribunal is whether the applicant is liable to additional tax by way of penalty of 25 per cent of the tax shortfall in each of the six years in question and whether such penalty should be remitted in whole or in part.
At the hearing the applicant, Mrs H. Ryvitch, was represented by Mr M. Flynn, of counsel, and the respondent by Mr T. Murphy, of counsel. No witnesses were called to give evidence. In addition to the documents provided by the respondent pursuant to s.37 of the Administrative Appeals Tribunal Act1975, the following documents were tendered for the applicant:
Transcript of Federal Court proceedings, V214 of 1999 dated 30 April 2001 – exhibit A1
Copy of affidavit of Mrs Ryvitch dated 1 March 2000 – exhibit A2
Copy of affidavit of M.P. Madder dated 1 March 2000 – exhibit A3
Affidavit of Mrs Ryvitch dated 4 June 2002 – exhibit A4The background to this matter can be taken conveniently from the reasons for judgment of Sunberg J as follows:
…
BACKGROUND1 This case concerns a decision by the respondent (the Commissioner) to disallow tax deductions claimed by the applicant (Mrs Ryvitch) for losses incurred on the sale of four units situated at 1105-1107 Malvem Road, Toorak. The units were acquired by Santop Pty Ltd (Santop) on 21 April 1990, redeveloped by it between May 1990 and March 1992, and sold by it in August and September 1994. Santop was incorporated on 12 February 1990. On 4 April 1990 Mrs Ryvitch, her late husband Dr George Simmelmann (Dr Simmelmann), his brother Jeffrey (Mr J Simmelmann) and Mr J Simmelmann's wife Marion (Mrs Simmelmann) became shareholders in Santop and, with the exception of Mrs Simmelmann, were appointed directors of the company. Mrs Ryvitch was appointed the company's secretary.
2 In her income tax returns for the years ended 30 June 1993 to 30 June 1995 inclusive, Mrs Ryvitch claimed the following deductions in respect of losses incurred as a result of the development of the units:
· $600,569 in the year ended 30 June 1993
· $2,303 in the year ended 30 June 1994
· $23,401 in the year ended 30 June 1995.
In her returns for the 1994, 1995 and 1996 years Mrs Ryvitch carried forward losses of:
· $448,613 in the year ended 30 June 1994
· $405,154 intheyearended30June 1995
· $382,571 in the year ended 30 June 1996.
In or about February 1997 the Commissioner commenced an audit of the taxation affairs of Mrs Ryvitch and Santop. In consequence of the audit the Commissioner formed the view that the deductions claimed by Mrs Ryvitch in respect of the losses should be disallowed. On 10 June 1997 the Commissioner issued notices of assessment for the years of income ended 30 June 1993 to 30 June 1995 inclusive. A notice of assessment for the year ended 30 June 1996 was issued on 15 September 1997. By notices of objection dated 26 August 1998 Mrs Ryvitch objected to each of these assessments. By notice dated 15 March 1999 the Commissioner disallowed the objections. By application filed on 5 May 1999 Mrs Ryvitch appealed to the Court against the Commissioner's decision to disallow her objections.
KEY ISSUE IN DISPUTE: PARTNERSHIP OR COMPANY?3 Section 92(2) of the Income Tax Assessment Act 1936 (Cth) provides that:
"Where a partnership loss is incurred by a partnership in a year of income, there shall be allowable as a deduction to a partner in the partnership:
(a)so much of the individual interest of the partner in the partnership loss as is attributable to a period when the partner was a resident.... "
Mrs Ryvitch contends that the units were purchased, developed and sold by a partnership of which she, Dr Simmelmann, Mr J Simmelmann and Mrs Simmelmann were the members, and that Santop merely acted as the partnership's nominee. Although there is no written partnership agreement, partnership correspondence or record of meetings of partners, and although no partnership income tax returns were lodged, Mrs Ryvitch claims there was an oral agreement between the partners made in or about March/Aprii 1990, the terms of which were to the effect that:
· the four individuals would enter into a partnership to purchase, subdivide and develop the property at 1105-1107 Malvern Road, Toorak into four units;
· a company would be acquired to purchase the property as a nominee for the partners;
· Mr J Simmelmann, through his company Naeroa Pty Ltd, would be responsible as builder and project manager for effecting the subdivision and development of the units;
· Dr Simmelmann and Mrs Ryvitch would finance the construction; and
· Mr J Simmelmann and Mrs Simmelmann would be entitled to 50% of the profits with the balance of the profit going to Dr Simmelmann and Mrs Ryvitch.
Alternatively, Mrs Ryvitch contends that the existence of a partnership is to be inferred from the conduct and statements of the shareholders in Santop. Specifically, she points to the following:
· the negotiations between Mrs Ryvitch and Mr J Simmelmann about who would be liable for the losses from the joint venture. Because there was no suggestion in any of the correspondence from Mr J Simmelmann or his solicitors that he could rely upon his limited liability as a shareholder to protect him from liability for any losses, it was to be inferred that the losses were to be borne personally;
· the claim by Mr J Simmelmann that he was to retain one unit upon completion of the venture;
· some accounts were prepared on the basis that the joint venture parties were in partnership and that Santop was a mere nominee;
· Santop had only nominal paid up capital;
· all funds were provided by Mrs Ryvitch and Dr Simmelmann from their personal resources;
· the use of the phrase "joint venture" in correspondence, indicating that the parties regarded themselves as in a contractual relationship independent of their shareholdings in Santop and that this relationship was in fact one of partnership; and
· references to sharing profits equally in correspondence.
In support of the Commissioner's submission that there was no partnership, attention is drawn to:
· the absence of a written partnership agreement, partnership correspondence, records of meetings of partners or partnership income tax returns;
· the absence of a partnership interest in the inventory of assets of Dr Simmelmann's estate (though his share in Santop is recorded); and
· the fact that Mrs Ryvitch did not claim any partnership loss in her tax return for the year ended 30 June 1993.
…
Mrs Ryvitch's late husband, Dr George Simmelmann, died on 16 October 1990. In her witness statement for the Court proceedings, Mrs Ryvitch said that the arrangements between her late husband and his brother, Mr J. Simmelmann, were concluded in late 1989 or early 1990 and she had little or no understanding of the precise terms of the arrangement. She said that, by late 1991, she was concerned at the slow rate of progress, the increasing costs and doubts about the terms of the arrangement between the brothers. Her personal relationship with Mr J. Simmelmann had broken down and communication with him was by correspondence through her accountant or solicitor. In correspondence from Mr J. Simmelmann or his solicitors between 5 December 1991 and 6 February 1992 there were claims by him that the arrangement entitled him to one unit, excluded him from any responsibility for losses and his involvement would be risk free and with no liabilities. The dispute was finally resolved in 1995 and it appears that Mr and Mrs J. Simmelmann retired as directors of Santop Pty Ltd, transferred their shares in the company to Mrs Ryvitch and she released and indemnified them from any liabilities. It was in 1995 that returns of income for the years ended 30 June 1993 and 1994 were lodged on behalf of Mrs Ryvitch.
In finding that there was no partnership, Sunberg J said (at paras 25-26):
…
25 When the agreement to share profits is viewed as part of the whole of the material before the Court, it becomes clear that the competing inference urged by the Commissioner is to be preferred to that propounded by Mrs Ryvitch. The following matters in particular (some of which have already been mentioned above), are to be noted in this connection:
there is no record of a partnership interest in the inventory of Dr Simmelmann's assets, yet his share in Santop is recorded;
Mrs Ryvitch does not claim any partnership loss in her tax return for the year ended 30 June 1993;
a corporate structure would be more consistent than a partnership with Dr Simmelmann's intention to assist and benefit his brother;
given that there was a heated dispute between Mrs Ryvitch and Mr J Simmelmann as to the details of the business arrangement from 1991-1993, if there was some partnership-type arrangement consistent with that claimed by Mrs Ryvitch, one would expect that during this period her accountants would have proceeded on that basis rather than on the basis that Santop was carrying on the enterprise;
the use of the term 'joint venture' makes sense when used in reference to a corporate structure;
in the annual returns for 30 June 1990-1993 Mrs Ryvitch effectively declares that Santop carried on the building development in its own right;
the trial balances for the years 1990-1993 proceed on the same basis as the annual returns; and
Mrs Ryvitch accepted that she had never been involved in a partnership with her husband or anyone else.
26 It is to be remembered that the question is not simply whether the conduct and statements of the parties point to a partnership-type arrangement. The terms of the arrangement must be identified with sufficient certainty. For the reasons given for concluding that there was no oral partnership agreement, those terms have been identified with sufficient certainty.
From the context of the decision of his Honour, it would appear that the word "not" has been inadvertently omitted before the words "been identified" in that last paragraph quoted above.
Sundberg J found that neither Mrs Ryvitch nor her accountant were reckless in claiming a partnership loss and said (at para 29):
…
29 The Commissioner imposed additional fax on Mrs Ryvitch - $32,566.38 in respect of the 1993 year, $6,663.57 in respect of the 1994 year, $6,509.44 in respect of the 1995 year and $12,235.01 in respect of the 1996 year. The material before the Court does not disclose the basis upon which the additional tax was imposed. However counsel for the Commissioner informed the Court that it was imposed under s 226H of the Act, and the matter proceeded on that basis. Section 226H provides:
"Subject to this Part, if.
(a)a taxpayer has a tax shortfall for a year; and
(b)the shortfall or part of it was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of this Act or the regulations;
the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part."
Although Mrs Ryvitch has failed to persuade me that the partnership alleged in fact existed, l do not think she or Mr Madder's firm were reckless in proceeding on the basis that there was a partnership. As a reading of these reasons will indicate, there were in the material available to the accountants some matters that made it arguable that a partnership existed. Although those matters, at least when viewed in the light of all the available material, were outweighed by other indications, I am unable to characterise the accountants' conduct as reckless - that is to say, grossly negligent. Nor do I think it was reckless to have proceeded on the basis that Mrs Ryvitch was entitled to claim the whole of the loss. On 31 January 1992 Mrs Ryvitch's solicitors wrote to her reporting on settlement discussions they had had with Mr J Simmelmann and his solicitors. They said:
"In relation to Joint Venture claims Mr Kiven for Mr & Mrs J Simmelmann indicated that they were prepared to settle any claims under the Joint Venture dispute and to resign as Directors and transfer shares held in Santop Pty Ltd on the basis that Mr & Mrs Simmelmann were released from any claims arising out of any loss that may ... have occurred in the Joint Venture or by Santop Pty Ltd in relation to the project."
On 27 April Mrs Ryvitch's solicitors wrote to Mr J Simmelmann's solicitors that Mrs Ryvitch:
"is agreeable to resolving the current dispute between our respective parties on the basis of the shares held by J & M Simmelmann being transferred to Mrs [Ryvitch] in consideration of a full release of all claims for loan accounts and loss of Santop Pty Ltd."
On 1 May Mr J Simmelmann's solicitors replied confirming their client's agreement to settlement on those terms. Later the parties disagreed about the precise content of the sale of shares agreement and release. On 10 September Mr J Simmelmann's solicitors complained that new matters could not be raised by Mrs Ryvitch's solicitors as "we believe settlement has been effected by our acceptance of your letter of the 27th of April, 1992 which makes no mention of the estate matters". Formal documents were not signed until much later, but Mrs Ryvitch and her advisers were in my view not reckless in proceeding on the basis that as a result of the exchange of correspondence culminating in Mr J Simmelmann's solicitors' letter of 1 May, Mrs Ryvitch was solely liable for the losses. It may be that on a close analysis of what happened after that date they were wrong to treat the matter as having been resolved (see Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 662, 669, 671-672), but that does not make them reckless.
On his reconsideration on remission of the decision on additional tax and his decision on the objections for the years ended 30 June 1997 and 1998, the respondent decided that additional tax pursuant to s.226G of the Income Tax Assessment Act1936 ("the Act") was appropriate. This section provides:
226G Subject to this Part, if:
(a)a taxpayer has a tax shortfall for a year; and
(b)the shortfall or part of it was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with this Act or the regulations;
the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part.
At the hearing, reference was made to s.226K, which provides:
226K Subject to this Part, if:
(a)a taxpayer has a tax shortfall for a year; and
(b)the shortfall or part of it was caused by the taxpayer, in a taxation statement, treating an income tax law as applying in relation to a matter or identical matters in a particular way; and
(c)the shortfall or part, as the case may be, so caused exceeded whichever is the higher of:
(i)$10,000; or
(ii)1% of the taxpayer's return tax for that year; and
(d)when the statement was made, it was not reasonably arguable that the way in which the application of the law was treated was correct;
the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part.
Section 222C of the Act provides:
222C(1) For the purposes of this Part:
(a)the correctness of the treatment of the application of a law; or
(b)another matter;
is reasonably arguable if, having regard to the relevant authorities and the matter in relation to which the law is applied or the other matter, it would be concluded that what is argued for is about as likely as not correct.
It seems clear that the question before the Federal Court of whether the development was carried on as a partnership or by Santop Pty Ltd in its own right was a question of fact and did not involve a conclusion of law. Consequently, it is difficult to see that s.226K has any relevance to the matter of additional tax.
For the applicant, it was submitted that the treatment adopted in her returns of income was not wrong because of carelessness or an omission to take into account relevant facts or a failure on her accountant's part to address a relevant issue. It was said to be wrong only because the applicant and her accountant misunderstood the relevant facts or, following the death of the applicant's husband, were not in a position to know all of the facts. It was argued that there was an honest and genuine attempt to correctly determine taxable income. It was further submitted that, if the Tribunal was to find that s.226G applied, it was appropriate to exercise the discretion in s.227 to remit part or all of the additional tax. It was said that the objectives of a penalty by way of additional tax are retribution, denunciation or deterrence and that the following factors should be taken into account in considering the discretion to remit:
· it is not appropriate to regard the process as a mathematic exercise based on percentages,
· it is irrelevant that the applicant did not seek a private ruling,
· the understatement arose as a consequence of the death of the applicant's husband and some sympathy should be shown in those circumstances,
· the respondent wrongly imposed excessive penalties originally,
· the applicant had incurred significant legal expenses and costs in taking her appeal to the Federal Court. An affidavit of the applicant stated that such costs exceeded $92,500.
For the respondent, it was submitted that the applicant and her accountant had failed to take reasonable care in lodging the relevant returns of income. It was said that the deductions were claimed notwithstanding that:
· neither the applicant nor her accountant had any real knowledge of the relationship,
· the income tax returns were inconsistent with annual statements filed by Santop Pty Ltd,
· the Court did not find simply that there was a failure to discharge the onus of proof but made a positive finding that there was no evidence of a partnership,
· the applicant had never been involved in a partnership with her husband or anybody else,
· the applicant was aware that she and Mr J. Simmelmann did not agree on the nature of the relationship,
· the applicant did not claim any interest in a partnership in the return for the year ended 30 June 1993,
· no partnership return was ever lodged, and
· the dispute with Mr Simmelmann was not resolved until 1995 and, to that time, the applicant had maintained that he was liable for part of the losses.
It is relevant to refer to the returns of Mrs Ryvitch for the years ended 30 June 1993 to 1995. The 1993-year was the year of the largest claim of $600,569. An examination of the return of that year which was lodged in July 1995 shows that the loss was not claimed as a loss from a partnership. It was claimed under the heading of a business loss as a "property operator" calculated as:
Business income 38,378
Cost of Sales $597,451
Interest Expense 38,378
Other Expenses 3,118 638,947
Loss $600,569
In addition, the return showed an "opening stock" of $1,597,451 and "closing stock" of $1,000,000. The difference between those two figures was the item "Cost of Sales". In the affidavit filed in the Court proceedings for the accountant, Mr Madder, it was stated that the figure was arrived at by revaluing the property to market value as at 30 June 1993. Mr Madder said that he formed the view that the properties were trading stock as being required for the purpose of renovation and immediate sale. He acknowledged that, in fact, the properties were rented out until sold for a total of $1,025,000 in August and September 1994 in the hope of an increase in value. In the year ended 30 June 1994 the loss of $2303 was shown as being business income of $53,460, interest of $53,460 and other expenses $2303. For 1995, a business loss of $23,401 was claimed, calculated as:
Business income 1,033,125
Less Cost of Sales $1,045,292
Interest Expense 8,675
Other Expenses 2,559 1,056,526
Loss $23,401
Two things should be said about these deductions claimed in the three years. First, the claims were on the basis that Mrs Ryvitch was a sole trader and no mention of any partnership was made. Secondly, the 1993 claim had to be on the basis that Mrs Ryvitch was carrying on a business of trading in real estate and the properties constituted trading stock allowing a reduction in the carrying value to a market value lower than cost. In relation to the first comment, this basis of the claim was completely at odds with the case put to the Federal Court where it was argued that the losses were partnership losses with the partnership agreement providing for her to bear such losses. In relation to the second comment, again, all of the argument has been that it was a partnership which acquired the properties for renovation and sale, not Mrs Ryvitch. Given the evidence, it is also doubtful that the properties constituted trading stock. It is difficult to see that Santop Pty Ltd either in its own right or, as argued by Mrs Ryvitch, as nominee for a partnership was carrying on a business of dealing in properties when it simply purchased four units, renovated and sold them. There was no evidence that any of the parties in the arrangement had ever been involved in any systematic purchase and sale of real estate. It is assumed that the "business income" shown in the returns other than the proceeds of sale in the 1995 year represented rental received from the units. Consequently, the claims in the returns for 1993, 1994 and 1995 were on the basis that Mrs Ryvitch was a sole trader entitled to the proceeds of sale, the proceeds of rent and personally incurring interest and other costs.
On 21 April 1993, the solicitors for Mrs Ryvitch wrote to Mr J. Simmelmann's solicitor and, inter alia, stated:
… the joint venture loss through Sandtop [sic] Pty Ltd is some $600,000 and Mr and Mrs Jeffrey Simmelmann are considered to be jointly liable for one half of the loss.
In her affidavit, filed for the Federal Court proceedings, Mrs Ryvitch referred to proceedings by Mr J. Simmelmann in relation to a legacy of $50,000 and stated (at para 25):
… In 1995 I obtained permission from the Taxation Office to pay him the legacy in order to settle the dispute and as part of the settlement of that dispute I also gave up any rights I might have had to seek compensation from Jeffrey Simmelmann for the loss that the joint venture incurred.
These statements demonstrate that, until 1995, Mrs Ryvitch maintained that the Simmelmanns were liable for 50 per cent of the loss and, even at that stage, appeared to be unsure of the basis of the arrangement and whether or not and in what capacity, Mr Simmelmann had any liability in respect of the loss.
Given the foregoing, while the views of Sundberg J that neither Mrs Ryvitch nor Mr Madder were reckless in proceeding on the basis that there was a partnership are respected and accepted, it would have been expected that some greater degree of caution should have been exercised in making the claims that were made. There were clear doubts on the basis of the arrangement and the liability for losses up to and including the time when settlement was reached with Mr J. Simmelmann. Even the basis of that settlement, which, from the statement in Mrs Ryvitch's affidavit, appeared to involve an abandonment of alleged rights to recover a share of losses from Mr Simmelmann as part of the consideration on the settlement, might well lead to the conclusion that the whole of the loss was never incurred by Mrs Ryvitch in the relevant years and not deductible to her. In view of these clear doubts, it is reasonable to have expected that either a private ruling under Part IVAA of the Taxation Administration Act1953 should have been sought or a the matter raised for the attention of the respondent pursuant to s.169A(2) of the Act. In my view the incorrect claims made without any other action was a lack of reasonable care and additional tax by way of penalty was property levied under s.226G of the Act. As the claims in the years ended 30 June 1996, 1997 and 1998 were for losses carried forward, primarily from 1993, the same lack of reasonable care was present. Sunberg J said (at para 29) that "… there were in the material available to the accountants some matters that made it arguable that a partnership existed". However, the returns were not prepared and lodged on the basis of a partnership existing.
Being of the view that s.226G properly applied, it is then a question of whether part or all of the additional tax should be remitted under s.227 of the Act. The first factor raised by Mr Flynn in support of remission was that it was not appropriate to regard the penalty process as a mathematical exercise based on percentages. For this, he relied on the decision of this Tribunal in AAT Case 5151 (1989) 20 ATR 3611 and the comments of Senior Member Beddoe at pages 3628 and 3629. However, in that case the Tribunal was dealing with additional tax imposed by the then s.223 or s.226 (depending on the year of income) in relation to the years ended 30 June 1981 to 1985. Those sections provided for additional tax of double the amount of a tax shortfall (200 per cent). The Tribunal was critical of a remission policy reducing the additional tax to 50 per cent and further remitted the additional tax to specific monetary figures. These provisions were replaced in 1992 by the specific penalty regime in ss.226 to 226ZB, which apply fixed percentages depending upon the circumstances which led to a tax shortfall. I am unable to see how AAT Case 5151 is of assistance since 1992. In support of the second contention, Mr Flynn relied upon the decision of Hill J in Hilton v Federal Commissioner of Taxation (1992) 24 ATR 91 where it was said (at p.99) that:
… There is no obligation upon a taxpayer to seek the approval of the Commissioner before making a payment out of a superannuation fund, no matter how prudent such a course may be in avoiding an ultimate dispute.
That case concerned the overpayment of a superannuation fund entitlement by the AMP and whether the sum was an eligible termination payment. As such it is considerably different in its facts to this case. In addition, it related to a period before self-assessment, before private rulings, before s.169A(2) and before the specific penalty regime, all of which commenced from 1992. In North Ryde RSL Community Club Limited v Federal Commissioner of Taxation (2002) FCA 313, the Full Court of the Federal Court, in considering a decision of the Tribunal to remit penalty to 7.5 per cent on the basis that the taxpayer should have sought a private ruling, allowed the appeal on the basis that a change of the Commissioner's view was discovered after the lodgement of the return, both sides were aware of the issue and would be dealt with in the assessment. Here, only Mrs Ryvitch and Mr Madder were aware of the issues and the doubts and the respondent became aware only by conducting an audit some years later. In relation to the third factor put by Mr Flynn, I acknowledge that Mrs Ryvitch and Mr Madder were left with some difficulties as the result of the death of the late Dr G. Simmelmann. Mrs Ryvitch had left all of the detail of the arrangements with his brother to her late husband and, only after his death was forced to make sense of such arrangements. It is accepted that she was not involved in the structuring of the investment and neither was Mr Madder. While I believe that Mr Madder should, at least, have been aware of doubts over the basis of the claims in 1993 and subsequent years, I accept that the difficulties caused by the death of Dr G. Simmelmann do lead to a view that some reduction of penalty is appropriate. The last two factors put by Mr Flynn, in my view, do not justify remittal of penalties. The higher rate imposed originally was fully dealt with by the Federal Court and the costs of that appeal were incurred at the choice of the applicant, were incurred well after the claims made in the returns of income and the issue of assessments and were incurred because she failed in her challenge against the disallowance of those claims.
As a result of the foregoing, I am prepared to vary the decisions under review by remitting additional tax from 25 per cent to 15 per cent of the tax shortfall in each of the years ended 30 June 1993 to 1998 inclusive.
I certify that the fourteen [14] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B.H. Pascoe, Senior Member(sgd) Catherine Thomas
ClerkDate of Hearing 11 June 2002
Date of Decision 24 July 2002
Counsel for the applicant: Mr M. Flynn
Solicitor for the applicant Messrs Kahn & Clahr
Counsel for the respondent Mr T. Murphy
Solicitor for the respondent Australian Government Solicitor