Subloo's Investments Pty Ltd, Daryl James Subloo and Sandy-Marie Subloo and Commissioner of Taxation
[2012] AATA 703
•11 October 2012
[2012] AATA 703
Division TAXATION APPEALS DIVISION File Number
2012/1069; 2012/4374-4375
Re
Subloo's Investments Pty Ltd, Daryl James Subloo and
Sandy-Marie Subloo
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President P E Hack SC
Date 11 October 2012 Place Brisbane (heard in Cairns) In each application the respondent's objection decision is affirmed.
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Deputy President P E Hack SC
CATCHWORDS
TAXATION – Goods and services tax – failure to report sales of apartments and account for GST – penalties imposed – decision not to remit penalties – did not contact Commissioner to report difficulties - intentionally and repeatedly disregarded the provisions of the legislation – decisions affirmed.
LEGISLATION
Taxation Administration Act 1953 (Cth) ss 284-25, 284-90, 284-220, 298-20(1)
CASES
Dixon (as trustee) v Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287
Re Khoury and the Commissioner of Taxation [2009] AATA 612
REASONS FOR DECISION
Deputy President P E Hack SC
11 October 2012
Introduction
The corporate applicant, Subloo’s Investments Pty Ltd, was the general partner, and the individual applicants, Daryl James Subloo and Sandy-Marie Subloo, the limited partners, of a limited partnership formed by deed in June 2004 and conducted under the name River Grande Apartments. The partnership was formed to construct and sell residential apartments in Innisfail.
It is a sufficient explanation for present purposes to say that the partnership failed to report sales of these apartments and account for GST on those sales to the respondent, the Commissioner of Taxation. As a consequence of that failure, substantial penalties, in excess of $460,000, were imposed on the partnership. The only issue in the present case is whether those penalties ought to have been remitted in whole or in part.
For the reasons that follow, the decisions not to remit were correct; those decisions will be affirmed.
The background
The factual background is not in dispute. Construction work on the apartments commenced in November 2006. Construction was anticipated to take 12 months but it took much longer. There were disputes with the builder which resulted in the partnership terminating the engagement of the builder in February 2009 and undertaking the completion of the work itself. In that month the partnership completed the first sale of an apartment.
When it completed and lodged its business activity statement (BAS) for that month the partnership did not report the fact of that sale nor account to the Commissioner for the GST collected. It did claim input tax credits on GST paid on creditable acquisitions that it made during that month with the result that, on the BAS as lodged, the partnership was entitled to a refund of $8,850. It is common ground that the partnership ought to have reported the sale in its February 2009 BAS and that, had it done so, the net amount payable by it to the Commissioner would have been $44,381.
The BAS for March and April 2009 were lodged on a similar basis i.e. sales were not reported but input tax credits were claimed with the result that the partnership received refunds of $15,941 (March 2009) and $73,206 (April 2009) rather than accounting for net GST amounts payable by the partnership in each of those months. The partnership made sales in a number of months thereafter until August 2010 but did not report any of those sales to the Commissioner, or account to the Commissioner for GST on those sales, in its BAS for those months.
The matter came to the attention of the Commissioner in 2011 when an audit of the partnership’s GST affairs was undertaken. That audit, which was completed in August 2011, showed a total GST shortfall of $534,018 which was the subject of a notice of assessment dated 12 August 2011. On 30 August 2011 the Commissioner made an assessment of shortfall penalty in the amount of $460,447.95 evidenced by a notice of assessment of that date. The Commissioner determined that the shortfall was a consequence of "intentional disregard" thus warranting a base penalty of 75% and that, except in the case of the first month, the base penalty amount ought be increased by 20% because of the repetition of the conduct.
On 1 September 2011 the partnership lodged a notice of objection to the penalty assessment. The Commissioner, on 18 January 2012, disallowed that objection. That decision is the subject matter of application 2012/1069 lodged in the Tribunal on 20 March 2012.
In the course of the Tribunal's interlocutory processes it emerged that there were some errors in the timing which had been attributed to the various sales. The result was that, by notices dated 5 September 2012, the Commissioner made assessments of net amounts payable for the February 2009, August 2009 and March 2010 period and amended assessments for each of March 2009, April 2009, May 2009, November 2009, December 2009, January 2010, February 2010, April 2010 and August 2010. Those assessments resulted in a fresh penalty assessment being made, evidenced by a notice of assessment dated 7 September 2012.
The partnership objected to the penalty assessment however that objection was disallowed by a decision made on 28 September 2012. That decision is the subject matter of application 2012/4374-4375 lodged in the Tribunal on 2 October 2012[1].
[1]The day before the start of the hearing. The parties are to be commended for their efforts to ensure that the hearing, already set down, could proceed as scheduled and decide all questions in dispute.
I should add that the parties are agreed that there is no basis for distinguishing between the two applications and that the same result should follow in each application.
The issues
The partnership does not contest liability to pay the GST net amount as assessed. Nor does it contest the characterisation of its conduct as intentional disregard, warranting the imposition of penalty at 75%, nor the uplift by 20%. The sole issue in the proceedings is whether the penalties ought be remitted, in whole or in part, pursuant to the discretion in s 284-90 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the Administration Act).
The legislation
Given the narrowness of the issues no detailed examination of the legislation is necessary. Division 284 of Schedule 1 to the Administration Act sets out the circumstances in which administrative penalties apply for, amongst other things, making false or misleading statements. Where there is a shortfall, that is, a tax liability, worked out on the basis of a false or misleading statement, is less than it would be if the statement were not false or misleading, it is necessary to characterise the conduct that led to the shortfall. If the shortfall resulted from an intentional disregard of a taxation law the base penalty amount is 75% of the shortfall amount. Recklessness warrants a penalty of 50% of the shortfall and a failure to take reasonable care leads to a 25% penalty.
The base penalty amount can be increased in the circumstances set out in s 284-220 of Schedule 1 to the Administration Act or reduced in the circumstances set out in s 284-25 of the same Schedule. But it is to be borne in mind that it is the Administration Act, not the Commissioner, which imposes the penalty; the task of the Commissioner is to characterise the conduct that led to the shortfall. Here, as I have said, there is no contest about characterisation.
The power in issue in the present case is conferred by s 298-20(1) of Schedule 1 to the Administration Act in simple terms:
The Commissioner may remit all or a part of the penalty.
If the Commissioner decides not to remit the penalty or to remit only part of the penalty the Commissioner must give written notice of the decision to the taxpayer. That decision may be objected to pursuant to Part IVC of the Administration Act.
Consideration
Mr Pope, counsel for the applicants, relied upon seven matters which he submitted warranted a favourable exercise of the discretion to remit. Those matters were as follows,
(a)the present situation arose because the applicants’ financier, without their consent, applied the GST component of the settlement proceeds in reduction of the mortgage debt rather than paying it to the applicants to enable GST to be paid;
(b)the applicants’ culpability was in not lodging returns for the correct amount where, through no fault of their own, the applicants were unable to pay the amount of the GST;
(c)the applicants always intended that the GST would be paid;
(d)the applicants and entities associated with them are otherwise compliant with their taxation obligations;
(e)the project involved was a one-off project outside the usual business expertise of the natural persons involved;
(f)the project got into financial difficulties through no fault of the applicants; and
(g)the applicants have entered into an arrangement for the payment of the primary tax.
But in his submissions, Mr Butler, counsel for the Commissioner, submitted that these matters, whether individually or collectively, did not warrant remission. The present case, it was contended, was factually indistinguishable from that considered by Senior Member Allen in Re Khoury and the Commissioner of Taxation[2]; because taxpayers in like circumstances should be treated consistently, the same outcome as in Khoury i.e. no remission, should apply here.
[2] [2009] AATA 612.
Some further reference to the facts is necessary to deal with the applicants’ submissions. Ms Subloo is a qualified accountant with a number of years’ experience. She was well familiar with the obligation to account for GST. The project was financed by an external financier. Ms Subloo’s evidence was that the financier’s position,
was that they would take the GST from the Settlement monies of each unit and apply it to the reduction of the credit facility.
Ms Subloo pointed, in support of this evidence, to an e-mail of 26 February 2009 from the Manager – Property Finance of the financier which read as follows,
Credit have recommended that we take the GST monies from this settlement – we will review going forward for future settlements.
The circumstances under which the GST monies were applied to reduce the applicants’ debt were not otherwise explored in the evidence. It may well be that the financier’s actions were unilateral and done without the consent of the applicants. There is, though, no evidence that the applicants sought the review spoken of in the email or that the applicants took any steps to oppose, or seek to reverse, the financier’s actions. Obviously enough, one of the consequences of the financier’s decision was to reduce the applicants’ debt to the financier and thus the burden of interest. It was, at least to that extent, in the applicants’ interests. And it seems to me to be significant that the applicants did not, at any time, draw to the Commissioner’s attention the fact that the GST components of the settlements were being applied in this way rather than in satisfaction of the applicants’ GST liability.
The same comment may be made in relation to the applicant's second point. The argument would have more force if the applicants had contacted the Commissioner and advised of any financial difficulties that they were experiencing. The fact that they did not do so and that they did not report the sales to the Commissioner rather suggests that they made a deliberate choice not to do so. So much is, in any event, confirmed by their acceptance that the shortfall arose from intentional disregard.
The applicants’ next point may be readily disposed of. It is, of course, easy to assert now that there had always been the intention to pay the GST; that asserted intention needs to be compared with the reality which was that the sums were not paid and that it was only the Commissioner's audit that detected the shortfall. The intention, even if it had existed, adds nothing to a case for remission.
The Commissioner submitted that the position of other entities associated with the applicant was irrelevant for present purposes. That may be right; I need not decide the point. It is enough to say that the material before me goes no further than demonstrating that at the present time entities associated with the applicants are up to date with the payment of their taxation liabilities and that, according to Ms Subloo they have always paid their taxation liabilities. I am unable to see how that fact is of present assistance. The taxation system operates on the premise that liabilities will be met. A poor history of meeting taxation liabilities might well tell against the exercise of discretion to remit penalties, but I do not accept that a history of compliance should tell in favour of the exercise of such discretion. The same is true of the applicants’ final point, that is, that they have entered into an arrangement for the payment of the primary tax. That is to be expected.
It may be accepted that this particular project was an unusual one and one outside the usual business expertise of the individual applicants. But, as I have said, Ms Subloo was a qualified accountant with some years’ experience. She, more than most, would have been well aware of the need to account to the Commissioner for GST and the desirability of contacting the Commissioner if there were difficulties experienced in doing so.
I do not regard the fact that the project got into financial difficulties through no fault of the applicants, assuming that to be the case, to have any particular relevance. The fact remains that the applicants chose not to account to the Commissioner for the GST on the sales of units over a considerable period of time. That may have been the consequence of the actions of their financier but they did not abate those actions by seeking to provide the monies from other sources or to inform the Commissioner.
The present case is not one that I consider warrants the exercise of the discretion to remit any or all of the penalties imposed. The applicants, over a period of about 18 months, chose not to account to the Commissioner for considerable GST and chose not to contact the Commissioner to explain such difficulties as they may have been experiencing. They accept that they intentionally disregarded the provisions of the legislation and did so repeatedly.
In Dixon (as trustee) v Commissioner of Taxation[3] the Full Court, in remitting a decision on the remission of penalties to the Tribunal, described the question for the Tribunal in these terms,
[3] [2008] FCAFC 54; (2008) 167 FCR 287 at [26].
The matter should have been remitted to the Tribunal for consideration of the question of whether any part of the penalty should be remitted on the basis that the outcome is harsh, having regard to the particular circumstances of the Taxpayer.
The penalty imposed here is large but that is the consequence of the operation of the legislation and the imposition of a percentage penalty. I do not regard the outcome in the present case as harsh in the particular circumstances of the applicants here. There is nothing in the applicants’ circumstances which suggest that remission is warranted. It follows that, in each case, I would affirm the objection decision.
I certify that the preceding 26 (twenty -six) paragraphs are a true copy of the reasons for the decision herein of Deputy President PE Hack SC ........................................................................
Associate
Dated 11 October 2012
Date of hearing 3 October 2012 Counsel for the Applicant Mr ME Pope Solicitors for the Applicant Derek Geddes Lawyers Counsel for the Respondent Mr DJ Butler Solicitors for the Respondent ATO Legal Services Branch
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