Terence John Byrt and Commissioner of Taxation
[2014] AATA 867
•21 November 2014
[2014] AATA 867
Division TAXATION APPEALS DIVISION File Number
2013/6230
Re
Terence John Byrt
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President P E Hack SC
Date 21 November 2014 Place Brisbane The decisions under review are affirmed.
....................[Sgd]....................................................
Deputy President P E Hack SC
CATCHWORDS
INCOME TAX – assessment – sale of mining tenements – profits not declared as income – decision under review affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth) s 6-5
Mineral Resources Act 1989 (Qld)
Taxation Administration Act 1953 (Cth) Sch 1, Div 284, 298
REASONS FOR DECISION
Deputy President P E Hack SC
21 November 2014
Introduction
Mr Terence Byrt was the owner of certain mining tenements. In May 2010 he, and an associated company, entered into an agreement to sell those tenements to a third party, Carabella Resources Ltd (Carabella). Mr Byrt received payment of part of the purchase price (in cash and in shares) in the 2010 income year. He did not disclose that amount in his 2010 income tax return.
The Commissioner of Taxation investigated Mr Byrt’s affairs and took the view that the money, and the value of the shares received by him, ought to have been included in his assessable income for the 2010 income year. The Commissioner made an amended assessment of taxable income for that year which included those amounts and made an assessment of shortfall penalty on the basis that Mr Byrt had been reckless, warranting a penalty of 50% of the tax shortfall, and had obstructed the Commissioner’s investigations, warranting an increase of the penalty by 20%.
Mr Byrt objected to the amended assessment and the penalty assessment. The Commissioner accepted that part of the proceeds did not amount to assessable income but maintained his view as to the balance and as to the imposition of penalty. Mr Byrt seeks a review of the Commissioner’s objection decisions.
Background
What follows is not in dispute. In the 2010 income year Mr Byrt carried on a business of resource asset trading. Those assets included coal and mineral exploration permits granted under the Mineral Resources Act 1989 (Qld). On 17 May 2010 Mr Byrt and his associated entity, Ansett Resources and Industries Pty Ltd (Ansett) entered into an agreement with Carabella to sell to Carabella the interests of Mr Byrt and Ansett in those tenements for a total cash consideration of $2,500,000 and the issue of 40,000,000 shares. Clause 2.1 of the agreement provided:
The Sellers agreed to sell the Assets, and the Buyer agrees to buy the Assets, from the Sellers:
(a)free from Third Party Interests;
(b)for the Purchase Price; and
(c) otherwise on the terms of this document.
The "Sellers" were Mr Byrt and Ansett, the "Buyer" was Carabella. The "Assets" were defined in the agreement as,
… the Tenements and the applications for Tenements set out in Schedule 1.
Schedule 1 listed seven tenements, five held by Mr Byrt; the others by Ansett. Mr Byrt held tenements 1173 (Bluff) and 1175 (Burnett), both applications for tenements, tenement 1249 (Barney View), which had been granted, and tenement 1542 (Pingine) and 1543 (Beecha Creek) where the Department had issued what the Schedule described as an "EPC Offer".
Clause 3.1 described the "Purchase Price" as the aggregate of,
(a)Deposit;
(b)First Tranche Payment;
(c)Second Tranche Payment;
(d)The Sale Shares.
The total amounts payable at each stage and the amounts referable to particular tenements were set out in Schedule 1. It will suffice for present purposes to say that Schedule 1 provided for payment to Mr Byrt of deposits totalling $5,909.[1] By virtue of clause 3.3 the deposit was payable on exchange of the agreement and was
non-refundable. In the result, on 17 May 2010, Mr Byrt received $1,456 referable to tenement 1249, $1,818 referable to tenements 1173, 1542 and 1543, and $2,635 referable to tenement 1175.
[1]There is a minor arithmetic error in the Schedule. The total of the deposits is $10,001, not the amount of $10,000 shown. The Commissioner has treated Mr Byrt as having received $5908. I will operate on the basis that this is the amount in issue.
The First Tranche Payment totalled $490,000 of which Mr Byrt was to receive $289,515. It was to be paid on "Completion" on the "Completion Date" defined as meaning on or before the date that was seven business days after the date of the agreement or another date agreed to in writing by the buyer and the sellers. Mr Byrt’s obligations on completion were set out in clause 5.2 in these terms:
At Completion, Byrt must give the Buyer:
(a)(ownership) absolute ownership of and title to the Assets free from Third Party Interests;
(b)(control) operational control of the Assets;
(c)(Mining Information) the Mining Information;
(d)(releases) signed releases, in registrable form, of each Third Party Interest (including any Encumbrance or charge) affecting the Assets;
(e)(Asset transfers) subject to clause 4.4, each document (in registrable form and otherwise in a form satisfactory to the buyer acting reasonably) that must be signed by the relevant seller to transfer each Asset to the Buyer;
(f)(title documents and records) the original of each document of title, each Environmental Approval at each other Authorisation for the Assets and a copy of all records, in any form, held by each Seller for the ownership or use of the Assets;
(g)(Charge) the Byrt Deed of Charge executed by Byrt;
(h)(Power of Attorney) the Byrt Power of Attorney executed by Byrt;
(i)(Declaration of Trust) the Byrt Declaration of Trust executed by Byrt;
(j)(Promoters Agreement) the Promoters Agreement executed by Byrt;
(k)(signing authority) any power of attorney under which any document delivered under this document has been signed;
(l)(tax invoice) if required under clause 12, a Tax Invoice for the money to be paid by the Buyer under clause 5.4(a);
(m)(Direction) if required a direction to the Department that the Buyer and its nominees are the sole representatives of the holders for all Assets of all dealings relating to those Assets;
(n)(Acceptance) provide acceptances (other than any cash consideration which will be payable by the Buyer) for the EPC Offers.
(o)(Withdrawals) the notices of withdrawal referred to in clause 6.3(f)(ii); and
(p)(other documents) every other document or thing, including any waiver or consent, this document requires the Sellers to give to the Buyer on Completion or which is reasonably required by the Buyer to vest the full ownership, title, possession and benefit of the Assets in the Buyer free from any Third Party Interest.
On completion, Carabella was obliged to pay the First Tranche Payment, to accept all items that Mr Byrt and Ansett gave it and to sign any documents that required its signature.
Completion took place on 25 May 2010. On that date Mr Byrt received $71,359 referable to tenement 1249, $89,030 referable to tenements 1173, 1542 and 1543, and $129,126 referable to tenement 1175, a total of $289,515.
It is unnecessary to examine the requirements of the agreement concerning the
Second Tranche Payment; despite taking the view of the audit stage that those proceeds form part of Mr Byrt’s assessable income for the 2010 year, the Commissioner resiled from that view at the objection stage.
Consideration of the "Sale Shares" is required. The term is defined in the agreement as meaning "up to 40,000,000 fully paid ordinary shares in the Buyer". By virtue of clause 3.7 of the agreement they were to be issued from time to time (if at all) to Mr Byrt and Ansett in the proportion set out in Schedule 1 on and subject to the strict occurrence of the events stipulated in that Schedule. The Schedule, so far as Mr Byrt is concerned, specified that certain of the shares were to be issued to him within seven days after the Department administering the Mineral Resources Act provided written confirmation that Carabella’s application for an exploration permit had been successfully lodged. In relation to tenement 1173 Mr Byrt was to be issued 3,495,146 shares and in relation to each of tenements 1542 and 1543, 1,886,269 shares were to be issued.
The Department of Mines and Energy provided the written confirmation required by clause 3.7 on 24 May 2010. It is not in issue that on 2 June 2010, Carabella allotted 7,267,684 shares to Mr Byrt. The Commissioner valued them at five cents per share yielding a value of $363,384.20.
Despite completion, much remained to be done and thereafter to give effect to the agreement. By clause 6.3 the parties acknowledge that the various applications for exploration permits included in the Assets could not be transferred and that it was necessary for the application for permits to proceed in the name of Mr Byrt and Ansett. The clause contains various covenants requiring the sellers to continue to progress the applications and to hold any permit for the benefit of Carabella upon the grant of it. Additionally, the clause contemplated that Carabella would lodge its own application for exploration permits.
Mr Byrt lodged his 2010 income tax return in January 2011. The amounts received pursuant to the agreement with Carabella were not disclosed in that return. The Commissioner commenced, or had commenced, an investigation into Mr Byrt’s holdings in mining assets in this and other years. The result was that on 3 April 2012 the Commissioner made an assessment of Mr Byrt’s taxable income for the 2010 income year in the amount of $238,055 in accordance with the return as lodged. The following day he made an amended assessment, increasing Mr Byrt’s taxable income by $3,021,139 to $3,259,194. The increase was comprised of,
(a)Deposit received on 17 May 2010 $5,908
(b)First Tranche Payment received on 25 May 2010[2] $289,514
(c)The value of 7,267,684 shares allotted on 2 June 2010 $363,384
(d)The value of 5,825,243 shares issued on assignment
of tenement 1249 $2,330,000
(e)The net value derived by the assignment of EPC 1065 $32,333
On the same day an assessment of shortfall penalty was made on the basis that the shortfall had resulted from Mr Byrt acting recklessly, warranting a 50% penalty. That penalty was increased by 20% for aggravating conduct, described in these terms:
Until late August or September 2011, you failed to engage with us or the audit process. You did not respond to repeated attempts made by Australian Taxation Office officials to contact you. Furthermore, you were assessed on shortfall penalties in both 2007 and 2008 income years, as a result of previous audit action.
[2]It is not clear why this amount, rather than the $289,515 required by Schedule 1, was included however the difference may be disregarded.
Mr Byrt promptly objected to the amended assessment and to the penalty assessment. The objection encompassed the amounts in paragraphs (a) to (d) above; the addition of the income from EPC1065 was not objected to and that matter may be disregarded. On 26 September 2013 the Commissioner made the objection decision in issue in these proceedings. He allowed Mr Byrt’s objection to the extent of excluding the amount of $2,330,000 (paragraph (d) above) but otherwise disallowed the objection.
THE LEGISLATION
No detailed reference to the legislation is required. Section 6-5 of the Income Tax Assessment Act 1997 (Cth), so far as presently relevant, provides:
Income according to ordinary concepts (ordinary income)
1)Your assessable income includes income according to ordinary concepts, which is called ordinary income .
Note:Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.
2)If you are an Australian resident, your assessable income includes the * ordinary income you * derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
3)…
4)In working out whether you have derived an amount of * ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
Division 284 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the Administration Act) deals with the imposition of penalties. It will suffice for present purposes to say that a penalty is imposed where a taxpayer makes a statement to the Commissioner that is false in a material particular, whether because of things in the statement or things omitted from it, and the taxpayer has a shortfall amount, that is the tax liability on the basis of the statement is less than it would be if the statement were not false or misleading. That operates in the present case in this way according to the Commissioner’s case. Mr Byrt’s 2010 tax return was a statement to the Commissioner. It omitted the three amounts that the Commissioner contends are assessable income and thus material. Mr Byrt’s tax liability, on the basis of his return, was less that it would have been, had his return not been false or misleading; that is, had the three items been included in his assessable income.
The quantum of the penalty is determined as a percentage of the shortfall by reference to an assessment of the characterisation of the conduct that led to the shortfall. Intentional disregard warrants a penalty of 75%, recklessness 50%, and failure to take reasonable care 25%. That penalty, described as the base penalty amount, may be increased in the circumstances set out in s 284-220(a) of Schedule 1 to the Administration Act.
284-220 Increase in base penalty amount
(1) The * base penalty amount is increased by 20% if:
(a)you took steps to prevent or obstruct the Commissioner from finding out about a * shortfall amount, or the false or misleading nature of a statement, in relation to which the base penalty amount was calculated; or
(b) …
(c)the base penalty amount was worked out using item 1, 2 or 3 of the table in subsection 284-90(1) and a base penalty amount for you was worked out under one of those items previously; or
(ca) the base penalty amount was worked out using item 3A, 3B or 3C of the table in subsection 284-90(1) and a base penalty amount for you was worked out under one of those items previously; or
(d)the base penalty amount was worked out using item 4, 5 or 6 of that table and a base penalty amount for you was worked out under that item previously; or
(e)your liability to a penalty arises under subsection 284-75(3) and you were previously liable to a penalty under that subsection.
Finally s 298-20 of Schedule 1 to the Administration Act confers a discretion on the Commissioner to remit all or part of the penalty.
CONSIDERATION
It is as well to start with what is not in issue. It is not in issue that Mr Byrt received $5,908 on 17 May 2010 and that he received a further amount of $289,514 on
25 May 2010, in each case in partial payment of the amounts due to him under the agreement of 17 May 2010 to sell various tenements. Nor is it in issue that on
2 June 2010 Mr Byrt received shares to the value of $363,384.Mr Byrt says that those receipts do not represent taxable income for a variety of reasons. In relation to tenement 1249, representing $1,456 of the deposit and $71,359 of the First Tranche Payment, he says that the assignment of that tenement to Carabella was not approved by the responsible Minister until November 2010, outside the 2010 income year. Hence, it is said, the transfer of Tenement 1249 was not effected in the 2010 income year and monies received in relation to the sale are not assessable income in that year.
In relation to tenements 1173, 1142 and 1143 Mr Byrt says that he only abandoned those applications on or around July 2010 thus he cannot be assessed on $1,818 of the deposit and $89,030 of the First Tranche Payment referable to those tenements.
The argument in relation to tenement 1175 relies on the fact of approval of the assignment by the Minister in December 2011 with the result that $2,635 of the deposit and $129,126 of the First Tranche Payment are not assessable income in the 2010 income year.
In the course of making submissions in the hearing Mr Byrt raised a further matter, seemingly for the first time, which was that he was not the holder of tenement 1249, despite it being referred to in the 17 May 2010 agreement. Assuming, favourably to
Mr Byrt, that it is open to him to rely on that as a ground of objection and that it was the fact, despite not having ever been raised before, the point does not assist him. Nor does his other essential argument, articulated by him at the hearing, that the Commissioner cannot assess him on the receipts until the tenements were granted to Carabella.The arguments presented by Mr Byrt miss the point. Assignment of the tenements was the end point of the Carabella agreement but, as the agreement acknowledged, the tenements were not capable of being transferred. But Mr Byrt was able to covenant to do all the things that the parties contemplated would achieve the end of having the tenements in the name of Carabella. He was paid the various amounts and received them in the 2010 income year. They were receipts in the ordinary course of the business he was conducting. It is income according to ordinary concepts. The deposit was his absolutely from the moment the argument was executed. Even if the agreement had allowed for the repayment of the other amounts, he has not been required to do so. And it is of no moment had it been the case that he and Carabella had contracted in relation to a tenement not owned by him. That may have had consequences so far as he and Carabella are concerned but it does not alter the revenue consequences of the receipt by him of monies payable under the agreement.
The objection decision was to that extent, correct. It will be affirmed.
Mr Byrt’s objection and the submissions lodged on his behalf contend that he took reasonable care, and thus ought not be liable for the penalty. It is enough to say that his evidence fell well short of demonstrating the matters asserted on his behalf and well short of demonstrating that he took reasonable care. He has not shown that the shortfall penalty assessment was excessive.
Mr Byrt addressed no arguments to remission but I cannot see, in any event, that there is any basis for remission of the penalty. He is an experienced businessman. The transaction was somewhat out of the ordinary however, on a proper analysis of it, no degree of sophistication is needed to see that the receipts were assessable. There is no evidence that Mr Byrt sought advice about the proper treatment of those receipts before lodging his return or that he even informed his tax agent of the receipts.
Finally, the increase of the penalty is justified on the basis that Mr Byrt had previously been assessed to penalty thereby triggering paragraph (c) of s 284-220(1) of Schedule 1. Contrary to the view taken by the auditor I find it difficult to see how it could have been concluded that Mr Byrt took steps to prevent or obstruct the Commissioner from finding out about a shortfall amount. Without the benefit of argument on the point it is not apparent to me that ignoring the Commissioner, as it would seem Mr Byrt did, amounts to taking steps to prevent or obstruct the Commissioner. It is not necessary to reach a view on that matter given that the uplift in penalty is warranted by the fact that a base penalty amount had been imposed on Mr Byrt previously.
If follows that the decisions under review will be affirmed.
I certify that the preceding 28 (twenty -eight) paragraphs are a true copy of the reasons for the decision herein of Deputy President PE Hack SC ..........................[Sgd]..............................................
Associate
Dated 21 November 2014
Date of hearing 4 November 2014 Applicant In person Counsel for the Respondent Mr L Clark Solicitors for the Respondent McInnes Wilson
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