Terri Yazbek and and Commissioner of Taxation
[2014] AATA 423
•27 June 2014
[2014] AATA 423
Division Taxation Appeals Division File Numbers
2010/4017-4019
Re
Terri Yazbek
APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Numbers
2010/4020-4022
Re
Lewis Yazbek
APPLICANT
And
Commissioner of Taxation
RESPONDENT
Decision
Tribunal Deputy President R Deutsch
Date 27 June 2014 Place Sydney The decisions under review in respect of the primary liabilities of the Applicants for the years ended 30 June 2005, 2007 and 2008 are affirmed.
The decision under review in respect of the liabilities of the Applicants for shortfall penalty for the years ended 30 June 2005, 2007 and 2008 is set aside and substituted with a decision that the penalty is set at the rate of 25%.
......................[sgd]..................................................
Deputy President R Deutsch
Catchwords
TAXATION – Income Tax –whether dividends derived by partnership or individuals – whether dividend “paid” to applicants – “paid” includes payment by direction – failure to include dividends in assessable income - penalties – reckless as to operation of taxation law – reliance on professional advice – failure to obtain independent review does not amount to recklessness – failure to take reasonable care - decisions in respect of primary liabilities affirmed, decision in respect of shortfall penalty set aside and substituted
Legislation
Partnership Act 1892 (NSW); ss 20, 55
Income Tax Assessment Act 1936 (Cth); ss 44
Taxation Administration Act 1953 (Cth); Sch 1 s 298-20Income Tax Assessment Act 1997 (Cth); Sub-Divs 124-G, 124-M
Cases
Kelly v Kelly (1990) 92 ALR 74
O’Brien v Komesaroff (1982) 150 CLR 310
Pearson v DCT (2009) 74 ATR 437
Sent v FCT 2012 ATC 20-318
Ryvitch v FCT 2001 ATC 4405
Bell v FCT 2012 ATC 10-230
Picton Finance Ltd v FCT 2013 ATC 10-298
Coppell v FCT 2000 ATC 2010
Bant v Bant [2003] WASC 137
Harvey v Harvey (1970) 120 CLR 529FCT v Rozman [2010] FCA 324
REASONS FOR DECISION
Deputy President R Deutsch
INTRODUCTION
In their respective tax returns for the years ended 30 June 2005, 2007 and 2008, Mr Lewis Yazbek and Mrs Terri Yazbek (collectively referred to in this decision as the Applicants) did not declare certain amounts as assessable dividend income largely on the basis that because of certain events that took place on or around 14 June 2005, the dividend income in question had not been derived by them. The Respondent disagreed and took the view that those dividend amounts had been derived by the Applicants notwithstanding the events on or around 14 June 2005.
The Respondent also raised the argument that if the dividend income had been so derived by the Applicants, there must have been a transfer of property and accordingly a capital gain would arise to each of the Applicants with the consequence that the amount of the capital gain would form part of the assessable income of each Applicant and tax would therefore be payable on that gain. The Applicants disagreed.
The Applicants further argued that if there was a capital gain, a capital gains tax roll-over would apply such that no tax would arise by virtue of the capital gain. The Respondent disagreed.
Accordingly the Respondent made amended assessments in relation to each Applicant for those years.
In addition, the Respondent also assessed the Applicants to administrative penalties at the rate of 50 per cent on the basis of recklessness as to the operation of the income tax law.
The Applicants’ objections against the amended assessments and the assessments of penalty were disallowed.
The Applicants have applied to this Tribunal for review of those objection decisions.
FACTS
The Persons/Entities Involved
(a) The Applicants
The Applicants are two individuals who have, at all material times, been residents of Australia and were previously husband and wife.
(b) Rocbit Pty Limited
On 27 April 1994 a company called Rocbit Pty Limited (Rocbit) was incorporated and its shareholders were the Applicants, each having acquired one ordinary $1 share in Rocbit.
The share registry maintained by Rocbit records that acquisition although there is a small discrepancy as to the exact acquisition date – the company’s share register shows the date as being 27 April 1994, while the Australian Securities and Investments Commission records suggest 6 May 1994. Nothing of any significance would appear to arise as a result of this discrepancy.
It appears that those records suggest that the Applicants remained as the legal and beneficial owners of their respective shares for the whole of the period in dispute.
(c) The Rocbit Limited Partnership
On 14 June 2005 the Rocbit Limited Partnership (the Rocbit LP) was registered in New South Wales under the Partnership Act 1892 (NSW) and the Applicants were named as the only two original limited partners. A Limited Partnership Agreement (the LP Agreement) was executed on 12 June 2005 pursuant to which a company named Vilworth Pty Limited (Vilworth) was named as the General Partner, and the General Partner was named as the entity that would manage the business of the partnership. The business of the partnership was the management of the financial affairs of the limited partners. The liability of the limited partners for the debts of the partnership was capped at $10 each.
The capital of the partnership was divided into shares with each share conferring an interest in the partnership but not an interest in any particular asset of the partnership.
In the period in question only two shares were issued, namely one ordinary share to each of the Applicants. Each ordinary share carried identical rights.
The LP Agreement was to the effect that the income of the partnership was to be retained or accumulated within the partnership and would only be distributed by a formal resolution of the partners. The partners had the ability to determine the allocation of partnership income and losses on a year by year basis, and the partners could by way of a unanimous resolution decide that the income of the Partnership, and any losses, would be divided between the Partners in proportions which were different to those in which they owned the Partnership Capital.
The partners could under the LP Agreement reallocate the capital of the partnership between the partners in proportions which were different to those specified in the LP Agreement.
Finally, and perhaps most importantly, clause 6.6 of the LP Agreement obliged the Applicants to ‘contribute the money or property specified in Item 1 as their contribution to the capital of the Partnership’. Item 1 specified all the shares in Rocbit of which the relevant partner was the registered owner at that time.
(d) Vilworth Pty Limited
Vilworth is and was at all relevant times a company resident in Australia and its sole director is and was at all relevant times one of the Applicants, namely Mr Lewis Yazbek. Its shareholders were Mr Lewis Yazbek as to 90% and Mr Richard Yazbek, the son of the Applicants, as to 10%.
Vilworth was at all relevant times:
·the trustee of the Lewis Yazbek Family Settlement Trust (the Yazbek Trust); and
·the General Partner of the Rocbit LP.
Vilworth in its capacity as the trustee of the Yazbek Trust held the whole of the beneficial interest in certain shares in a company called Baydome Pty Limited (Baydome). The legal owner of those shares was Lewis Yazbek. The exact number of shares so held at any given time varied but at all relevant times it appears that the number was no less than 6,327,000.
(e) The Yazbek Trust
The Yazbek Trust is a discretionary trust settled on or around 15 July 1982. The class of persons referred to in the relevant discretionary trust deed creating the Yazbek Trust as the eligible beneficiaries included both of the Applicants and Rocbit.
The Limited Partnership Capital Contribution Agreement
On or about 12 June 2005 the Applicants signed a further agreement, namely a limited Partnership Capital Contribution Agreement (the CC Agreement), which recited as part of its background the fact that the partners have agreed to contribute capital to the partnership in the form of property upon registration of the partnership as a limited partnership under section 55 of the Partnership Act 1892 (NSW).
The CC Agreement went on to provide that upon registration of the partnership as a limited partnership, the partners shall contribute property or money to the capital of the partnership in the amount specified in Item 2 or such other amount as the partners may from time to time resolve and that the partners shall contribute the partnership capital in the proportions specified in Item 2.
Having specified the requirement to contribute the property in a manner outlined in the previous paragraph the CC Agreement then provides that:
“The Partners shall not be required to transfer the property to the Partnership but shall provide the General Partner with a power-of-attorney to deal with property and shall permit the property to be mortgaged or charged by the General Partner and shall apply any income or proceeds of sale from such property to the business of the Partnership.”
Item 2 of the Schedule to the CC Agreement specified under the heading “Capital Contribution” with respect to the Applicants – “All of the Shares owned by the Partners in the Capital of Rocbit Pty Limited”.
The Powers of Attorney
On or about 12 June 2005, the Applicants appointed the Rocbit LP, as the true and lawful attorney, to execute such documents and do on behalf of the Applicants anything the Applicants could lawfully authorise an attorney to do in respect of all shares held by the Applicants in Rocbit. This appointment was declared to be revocable simply by notice of such revocation being received by the attorney.
An undated partnership share certificate was issued by Vilworth to each of the Applicants certifying that the Applicants had become the registered holder of one partnership share each in the Rocbit LP.
The Distributions in the year ended 30 June 2005
In the year ended 30 June 2005, the Yazbek Trust distributed $1,979,418 to Rocbit. Rocbit returned that trust distribution as assessable income, and it also recorded the receipt of that distribution in its profit and loss statement.
On or around 12 June 2005, the directors of Rocbit passed a resolution resolving to:
·declare a Class C fully franked dividend of $414,849 payable to the members whose names appear on the Register of Members as holders of ordinary class shares; and
·distribute the dividend based on the present holdings of the shares as follows – the Rocbit LP – 2 shares - $829,698; and
·credit the dividend to the loan accounts of the respective shareholders on the day following the date of the resolution.
In other words, the dividend was not physically paid but was credited to the loan accounts of the respective shareholders on the day following the date of the resolution. Thus, it was treated as an amount owing by Rocbit to the respective shareholders.
At that time and indeed at all relevant times the names appearing on the Register of Members were the Applicants.
A further resolution was then passed distributing, by way of dividend from Rocbit to the shareholders, the trust distribution of $1,979,418 received by Rocbit from the Yazbek Trust, together with an additional amount of $193,664. Thus, this dividend was for a total amount of $2,173,082.
Thus, the total agreed dividend was $3,002,780 being one dividend for a total of $829,698 and a second dividend of $2,173,082. This represented the sum of the accumulated profits of $1,042,819 and the current year profits being the trust distributions of $1,959,961.
The Distributions in the year ended 30 June 2006 and 2007
In the year to 30 June 2006 and 2007, it was agreed that the Yazbek Trust distributed $184,053 and $198,872 to Rocbit. Rocbit returned those trust distributions as assessable income and recorded those amounts in its profit and loss statements for the year ended 30 June 2006 and year ended 30 June 2007 respectively.
Further to an undated resolution, a dividend of $200,000 was declared by Rocbit in the year ended 30 June 2007. The payment of this dividend was recorded in the profit and loss statement of the Rocbit LP of the year ended 30 June 2007 and was returned by the Rocbit LP as assessable income for that year. It was returned as a fully franked dividend and as a consequence no tax would arise.
The Distributions in the year ended 30 June 2008
In the year to 30 June 2008 the Yazbek Trust distributed $410,495 to Rocbit. Rocbit returned that trust distribution as assessable income and recorded that distribution in its profit and loss statement for the year ended 30 June 2008.
It seems that a dividend of $385,000 was paid by Rocbit to the Rocbit LP during the year ended June 2008 but there does not appear to be a written resolution to pay the dividend. Nonetheless the profit and loss statement and income tax return of the Rocbit LP for the year ended 30 June 2008 record the dividend and the Respondent accepts that such a dividend was paid in the manner indicated. That dividend returned by Rocbit LP was fully franked and as a result no tax would arise.
The Income Tax Returns of the Applicants
The dividends declared by Rocbit were agreed as:
·an amount of 829,698 for the year ended 30 June 2005;
·an amount of $2,173,082 for the year ended 30 June 2005;
·an amount of $200,000 for the year ended 30 June 2007; and
·an amount of $385,000 for the year ended 30 June 2008.
These dividends were not returned as assessable income of the Applicants in respect of the years referred to.
Further, they did not at any time disclose that a CGT event had happened during June 2005.
The Audit and its outcome
As a result of an audit of the tax affairs of each of the Applicants, the Respondent issued Notices of Amended Assessment dated 12 April 2010 to each Applicant. As a result the taxable income of each Applicant was increased by the inclusion in assessable income of the amount of dividends (including associated franked credits) paid by Rocbit. Thus relevant adjustments can be outlined as follows:
Year
Dividends per Applicant
Franking Credits per Applicant
2005
$1,501,390
$643,453
2007
$100,000
$42,857
2008
$192,500
$82,500
The franking credits were allowed by the Respondent as tax offsets against each Applicant’s income tax payable for each of the relevant years.
On 12 May 2010, the Respondent issued the Applicants with Notices of Assessment and Liability to Pay Penalties. Pursuant to these notices, the Applicants were assessed as liable to pay penalties at 50 per cent of the shortfall amount on the basis that the Applicants and their tax agent had been reckless as to the operation of the relevant taxation laws. This gave rise to penalties as indicated below:
Year
Lewis Yazbek
Terri Yazbek
2005
$195,347.81
$194,978.31
2007
$9,901.52
$10,070.32
2008
$19,840.11
$6,636.52
The Applicants lodged objections to both the amended assessments and the penalty assessments and these objections were disallowed by the Respondent by notices issued to the Applicants on 3 August 2010. Those objection decisions are the subject of these proceedings.
Table: The Structure - Before and After
Tables 1 and 2 found at the end of this decision present the structure of the entities involved according to the Applicant before (Table 1) and after (Table 2) the relevant events of June 2005.
THE ISSUES
Fundamentally, there appears to be four issues between the parties.
First, whether the dividends can be said to have been derived and therefore are assessable for tax purposes in the hands of the Rocbit LP and not in the hands of the Applicants individually.
Secondly, even if the dividends are assessable only in the hands of the Rocbit LP, whether in the year ended 30 June 2005 there was a CGT Event A1, with respect to the shares that the Applicants held in Rocbit, which gave rise to a capital gain.
Thirdly, whether, if that is the case, the Applicants or either one of them could satisfy the statutory conditions to enable them to choose to obtain CGT roll-over relief under Sub-Divisions 124 – G and124 – M of the Income Tax Assessment Act 1997 (ITAA 1997).
Fourthly, whether the level of penalties was appropriate or whether they should be reduced or remitted either in whole or in part.
THE APPLICANTS’ POSITION ON THE FIRST ISSUE
The Applicants’ primary contention is that the shares in Rocbit became partnership property of the Rocbit LP, with the consequence that any dividend paid on those shares was assessable for tax purposes to the Rocbit LP and not to the Applicants individually.
Further, the Applicants contend that within s 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936) it was the Rocbit LP that was relevantly the shareholder, and any dividend was paid or credited particularly in the shareholder dividend statement to the Rocbit LP and not to the Applicants.
THE RESPONDENT’S POSITION ON THE FIRST ISSUE
The Respondent’s primary contention is that the shares in Rocbit never became partnership property of the Rocbit LP. In particular, they assert that the idea that the shares became partnership property of the Rocbit LP is inconsistent with the transaction documents and the evidence.
Further, the Respondent contends that pursuant to s 44(1) of the ITAA 1936 it was the Applicants that were the relevant shareholders and any dividend was paid or credited to them.
WAS ANY PROPERTY, RIGHT OR INTEREST IN PROPERTY BROUGHT INTO THE PARTNERSHIP STOCK AND IF SO WHAT WAS THE EXACT NATURE OF THIS PROPERTY, RIGHT OR INTEREST?
The central issue that is raised by the contentions is whether the shares in Rocbit became partnership property of Rocbit LP or not.
The starting point in resolving this issue in a case involving exclusively interests in New South Wales must be section 20(1) of the Partnership Act 1892 (NSW) which defines “partnership property” as being:
“All property, and rights and interests in property, originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business…and must be held and applied by the partners exclusively for the purposes of the partnership, and in accordance with the partnership agreement.”
In considering the question as to whether or not any property right or interest in property was brought into a partnership, the High Court in Kelly v Kelly (1990) 92 ALR 74 was of the view that the matter ultimately depends on the agreement reached by the partners and, where there is no express agreement, an agreement may be inferred from the manner in which the affairs of the partnership have been conducted. This view appears to be broadly in line with similar sentiments expressed in other decisions. Many of these decisions are referred to with approval in Bant v Bant [2003] WASC 137 at [10] where Wheller J comments:
“Whether property becomes partnership property will be determined by the agreement between the partners as well as their acts and intentions: O’Brien v Komaresoff at 322; Kelly at 78.
Such a question will not arise if, at the commencement of the partnership, there is express agreement between the partners regarding the status of the personal property introduced by partners in to the partnership: Evans v Gutheridge (1864) 1 WW & A’B € 119, SC (VIC); Elkin &CO PTY LTD V Specialised Television Installations Pty Ltd (1961) SR (NSW) 165; (1959) 77 WN (NSW) 8434, SC (NSW).
In the absence of express agreement, whether the property is partnership property may be implied by conduct or inferred by the court from all available evidence, including the partnership agreement, the conduct of all parties, accounting records and the partners’ understanding and knowledge of the requirements of the business: Harvey v Harvey per Menzies J at 553, at 563 per Walsh J. In determining whether property is that of the partnership, the courts must disregard legal title and not presume any more agreement between the partners regarding property than is absolutely necessary to give efficacy to the business: Miles v Clarke at 540; Kelly v Kelly at 79. Where a partner provides premises for the partnership business to operate from and there is no express agreement as to the status of the premises, factors such as the method of accounting to capital contribution in rent will be indicative of whether or not those premises are partnership property: Harvey v Harvey. Where the capital account of the partnership is credited with the value of the premises, the premises become partnership property in the absence of special agreement, although there has been no change in legal title: Robinson v Ashton (1875) LR 20 Eq 25 at 28 per Jessel MR. Where a partner is credited with regular rent payments this indicates the property belongs to that partner: Robinson v Ashton.”
In this application there are a number of express agreements that have relevance.
First, the LP Agreement expressly requires the Applicants to contribute all of the shares they held in Rocbit to the Rocbit LP. More specifically “partnership capital” is defined as follows:
(c)“Partnership Capital means the capital of the Partnership. This shall include the capital of the Partnership contributed in accordance with the amounts or property specified in Item 1 and shall include such further capital as may be contributed to the Partnership from time to time.”
The property specified in Item 1 in respect of each Applicant was defined as:
“All the shares in Rocbit Pty Limited of which this Partner is the registered holder in that company.”
Secondly, in this case a further agreement was entered into namely the CC Agreement. Critically this Agreement provides as follows:
“PARTNERSHIP CAPITAL
Upon registration of the Partnership as a Ltd Partnership the Partners shall contribute the property or money to the capital of the Partnership in the amount specified in Item 2 or such other renowned as the Partners may from time to time resolve. The Partners shall contribute the Partnership Capital in the proportion specified in Item 2.
The Partners shall not be required to transfer the property to the Partnership but shall provide the General Partner with a power of attorney to deal with the property and shall permit the property to be mortgaged or charged by the General Partner and shall apply any income or proceeds of sale from such property to the business of the Partnership. “
The relevant Item 2 entries referred to in each case were “All the Shares owned by the Partner in the Capital of Rocbit Pty Limited”.
The two paragraphs of the CC Agreement referred to above have the following effect:
(a)the first paragraph reiterates and confirms that the partners will each contribute the shares in Rocbit to the Rocbit LP; and
(b)the second paragraph provides the detail as to exactly the form which that contribution will take – specifically by establishing that the manner in which that contribution will be made is not by transferring the property to the Rocbit LP but by providing a Power of Attorney to the general partner of the Rocbit LP ( ie Vilworth) which will allow Vilworth to deal with the property including the ability to permit the property to be mortgaged or charged by Vilworth and to apply any income or proceeds from the sale of such property to the business of Rocbit LP.
The correct construction of the meaning of these two paragraphs is at the heart of the issue in this matter.
Before turning to a more complete discussion of the two agreements outlined above, there is a third document which is relevant, namely the Power of Attorney which nominates, constitutes and appoints the Rocbit LP as the Applicants’ attorney to essentially do on behalf of the Applicants anything that the Applicants may lawfully do with the shares they hold in Rocbit.
The Applicants’ View
According to the Applicants, when considered in totality there is an express agreement at the commencement of the partnership between the partners regarding the status of the personal property which is being introduced to the partnership by the partners. In each case the property specified is the shares owned in Rocbit and the proportional contributions specified as one share each in Rocbit. There is also an express reference to the fact that the partners shall contribute property or money to the capital of the partnership and the capital of the partnership will be the amounts so contributed.
From the Applicants’ perspective, the second paragraph of the Partnership Capital clause referred to above in the CC Agreement is strictly “facultative” and deals only with the bare legal title which is retained by the Applicants. That second paragraph cannot be used to overturn the express provision particularly found in the first paragraph of the Partnership Capital clause of the CC agreement.
Furthermore, all available evidence indicates that the shares have been treated either by conduct or by inference as partnership property by:
·the LP Agreement;
·the CC Agreement;
·the conduct of all the parties;
·the accounting records of the Rocbit LP; and
·the taxation returns of the Rocbit LP and the partners.
Thus, according to the Applicants the correct and proper conclusion is that the shares in Rocbit were partnership property and, accordingly, any dividends were derived and assessable for taxation purposes only by Rocbit LP and not by the Applicants individually.
The Respondent’s View
The Respondent argues that a different construction applies to the two paragraphs of the CC Agreement, especially when read with the Power of Attorney which gives Vilworth as the general partner of Rocbit LP the authority to:
“deal with the (the Applicants’ shares in Rocbit) and shall permit (the shares to be mortgaged or charged) by the General Partner and shall apply any income or proceeds of sale from (the shares) to the business of the Partnership.”
In particular, the Respondent asserts that it is plain from reading the clause that the intention of the Applicants as to how the contribution of the shares in Rocbit was to take place was by the authority being granted to Vilworth under a power of attorney to enable it to perform certain acts on behalf of the Applicants with respect to the shares. Accordingly, although the shares had been “contributed” to the Rocbit LP by the Applicants, this did not result in a transfer of the legal and/or beneficial interest in shares by the Applicants. It merely involved an agency relationship being created by the Applicants over the shares, such that the Rocbit LP had the authority to perform certain acts with respect to the Applicants’ shares. This created something akin to a “right to use” the shares for certain purposes and a right to an application of the income of the shares. It did not create any legal or beneficial interest in the shares.
Furthermore, the CC agreement did not give rise to an equitable assignment of the right to receive dividends - this is clear from the language used in the CC agreement which obliges the Applicants to apply the income from shares to the Rocbit LP business.
THE TRIBUNAL’S CONCLUSIONS ON THE FIRST ISSUE
As mentioned previously, the critical issue here is how the LP and CC Agreements and the Power of Attorney work together, and whether those three documents, constituting the express agreement of the parties, gives rise to partnership property and, if so, the exact nature of that partnership property.
While it is true that the LP Agreement required the Applicants to contribute all the shares they held in Rocbit to the Rocbit LP as the “initial capital” of the Rocbit LP, this “contribution” was qualified by the CC Agreement in four ways:
(a)The partners were not required to transfer their shares in Rocbit to the partnership;
(b)The partners were required to provide the General Partner (of the Rocbit LP) with a Power of Attorney to deal with the property;
(c)The partners were required to permit the property to be mortgaged or charged by the General Partner;
(d)The partners were required to apply any income or proceeds of sale of such property to the business of the partnership.
All four of these qualifications point in one direction only - namely that the shares in question were at all relevant times owned both legally and beneficially by the Applicants. How else can one explain, for example, that the partners shall permit the property to be mortgaged or charged, or that the partners are to apply the income of the property to the business of the partnership. These things it would seem could only be done if the underlying property is itself owned by the partners.
Further, the Register of Members of Rocbit recorded that, throughout the whole of the period from the beginning of the 2005 income year to the end of the 2008 income year, the Applicants each held one ordinary share and that those shares were beneficially held by each of them (see Exhibit R1 T7-91). Section 176 of the Corporations Act 2001 provides that:
“In the absence of evidence to the contrary, a register kept under this Chapter is proof of the matters shown in the register under this Chapter.”
The issue here is whether there is evidence to the contrary. The Applicants contend that for the purposes of s 44(1) of the ITAA 1936, it was the Rocbit LP, and not the Applicants, that was relevantly the shareholder. However that contention certainly does not sit well with the Register which records the Applicants as being the relevant shareholders at all times.
It is certainly the case here that there was an express agreement from the outset as to the contribution that was to be made by each of the Applicants to the Rocbit LP but, as I have already intimated, that agreement cannot be viewed as just arising from the LP Agreement. The totality of the agreements that were entered into must be considered and this would include both the LP Agreement and the CC Agreement. When read together these Agreements do not provide for a transfer of the shares in Rocbit, or even a transfer of the right to the dividends that flow from such shares. Rather, they allow for a right to use the shares for certain purposes and a right to an application of the income of the shares. In other words the dividend income has belonged at all times to the Applicants but upon derivation of that income it was immediately thereafter applied to the Rocbit LP in accordance with the terms of the CC Agreement.
In other words, this so-called “contribution” was a contribution of a limited nature and not a contribution of the full ownership in any real sense. The contribution was, for whatever reason, constrained and limited by the terms of the CC Agreement. There was some speculation that the reason such constraints were imposed was to somehow limit the impact of stamp duty but the specific details were neither sought nor provided. The reason itself seems of little relevance. What matters here are the consequences that arise from the agreements and not the reasons that the agreements were put in place.
This conclusion is in my view entirely consistent with the existing commentary in Bant v Bant, Harvey v Harvey (1970) 120 CLR 529 and O’Brien v Komesaroff (1982) 150 CLR 310. Those cases indicated that express agreement would effectively bind the parties. Here the express agreement embraced both the LP Agreement and the CC Agreement and when read together, as they must be, it is clear that what was contributed to the Rocbit LP was something less than full ownership of the shares or even the full ownership of the right to the dividend – it was a right to have the dividend income applied in favour of the Applicants after derivation by the Rocbit LP.
It follows from this conclusion that as the Applicants were the shareholders of Rocbit at the time the disputed distributions were made, all the key ingredients for the application of s 44 of the ITAA 1936 are met with one possible exception.
The four essential requirements which must be met in order to trigger s 44 are as follows:
(a)The assessed party must be a shareholder at the time the distribution was made;
(b)The distribution must be a dividend within the meaning of s 6(1);
(c)The dividend must be paid to the assessed party; and
(d)The company paying the dividend must have paid the dividend out of profits.
The first matter referred to has been resolved in favour of the Respondent such that the Applicants were the relevant shareholders at all relevant times. The second and fourth matters do not appear to be in dispute.
The critical issue for the purposes of this case is whether it can be said the dividend was paid to the Applicants. Importantly, s 6(1) of the ITAA 1936 defines the word “paid” in relation to dividends so as to include credited or distributed.
In this case, as mentioned previously, the board resolution to pay the dividends to each of the Applicants states that the dividends are to be “credited” by Rocbit to “the loan accounts of the respective shareholders”. The dividends were credited to the Rocbit LP thus satisfying the definition of paid in s 6(1), although this alone would only constitute a dividend paid to the Rocbit LP rather than to the Applicants.
The critical issue is whether the credit to the Rocbit LP is capable of constituting a payment to the Applicants for the purposes of s 44 and for the purposes of the s 6 (1) definition of “dividend”.
In this context it should be noted that the word “paid” is broadly defined so as to include “credited or distributed”. From the board minutes recording the resolutions to declare the dividends, it is clear that the dividends are payable to the members whose names appear on the Register of Members as holders. The minutes also make it clear that the dividends are to be credited to the loan accounts of the respective shareholders, however under the heading “Distribution” the recipient nominated is the Rocbit LP.
As mentioned previously, it is also clear from the Register of Members of Rocbit that the Applicants were the only shareholders and pursuant to cl 93(1) of the Rocbit Articles of Association, dividends are to be paid by cheque, posted to the address of the holder as shown in the register of members, or otherwise, as the holder or joint holders in writing directs or direct.
Pursuant to the CC Agreement, Vilworth is to “apply any income or proceeds of sale from (the shares the Applicants held in Rocbit) to the business of the Partnership”.
This amounts very clearly in my view to a direction given to the attorney by the Applicants, as principals, to apply all dividends they are paid on the shares in Rocbit to the Rocbit LP business.
In the Tribunal’s view this is sufficient to enable a conclusion to be reached that the dividends were relevantly paid to the Applicants. As already mentioned, but it is worth reiterating, the term “paid” as used in s 44 is given a wide scope so as to include “credited or distributed”. Although n relation to a different legislative provision (Division 7A), in FCT v Rozman [2010] FCA 324 Perram J held the word “pay” as used in s 109C of the ITAA 1936 includes a payment by direction.
I am of the view that s 44 should be interpreted in the same manner such that paid includes a payment by direction as there is nothing in s 44 or its statutory context to suggest a contrary conclusion is intended. Here, as discussed above, I believe there was a direction made by the Applicants to direct the dividend to the Rocbit LP and this enables the conclusion to be reached that the dividend was paid to the Applicants.
THE SECOND AND THIRD ISSUES
As I have resolved the first issue in favour of the Respondent, it is unnecessary to consider whether a capital gain would have arisen in respect of a CGT event if the dividend had been found to have been paid to the Rocbit LP. Furthermore, it is unnecessary for me to consider whether a rollover would have applied.
THE FOURTH ISSUE
The Applicants were liable to an administrative penalty during the relevant income years, because they made statements to the Respondent in their income tax returns for the 2005, 2007 and 2008 income years. They failed to include the dividends paid to them by Rocbit in their assessable income, and this resulted in the tax shortfall amount for the Applicants in each of the relevant years of income.
The penalties were assessed by the Respondent on the basis that the Applicants and their agent were reckless as to the operation of s 44 of the ITAA 1936.
The critical question for consideration here is whether or not the behaviour of the Applicants or their agents was reckless.
Recklessness is essentially gross carelessness or gross indifference to the consequences: Pearson v DCT (2009) 74 ATR 437 (emphasis added). Thus, mere carelessness or indifference is not enough – what is required is a behaviour which amounts to gross carelessness or indifference. This is in my view an important distinction.
Recklessness requires conduct which “clearly shows disregard of, or indifference to, consequences or risks that are reasonably foreseeable as being a likely result of the entity’s actions ie running what a reasonable person would regard as an unjustifiable risk”: Sent v FCT 2012 ATC 20-318.
Recklessness must be clearly established (Ryvitch v FCT 2001 ATC 4405) and it is not reckless merely because it is wrong as long as the taxpayer has a sound basis for the view adopted (Bell v FCT 2012 ATC 10-230).
The Respondent first argued that the failure to seek a second opinion amounts to recklessness on the part of the Applicants. While a failure by the Applicants to seek a second opinion may well be viewed as careless, I doubt a reasonable person viewing the matter objectively would view such action as gross carelessness.
Clearly from what has been said above, the test is an objective one which enquires into whether a reasonable person would regard what the Applicants have done as taking an unjustified risk.
In this case the Applicants sought and relied on the professional services of a qualified firm of solicitors who had a reputation in the field of taxation. The firm which was consulted devised a scheme which included a complex restructure involving multiple steps and complicated agreements which the Applicants themselves clearly did not fully understand. A second opinion from an independent tax advisor was not sought. Clearly in such a situation where the one firm has devised and is advising on the scheme in question, an independent review and analysis of the tax situation would be the preferred course of action.
Whether the lack of independent review amounts to recklessness is however a different matter. As mentioned previously, gross carelessness is a substantial threshold to establish and it does not seem to me to be appropriate to label someone who has engaged professional advisors who have expertise in taxation matters as reckless because they have not sought a second opinion. Even if there were some deficiencies in the advice provided, the Applicants would not have been aware of such deficiencies and would have had no basis for assuming any problems with the advice given. A reasonable person would not regard the failure to seek a second opinion as running an unjustifiable risk.
The Respondent has also indicated that the tax agent and solicitor of the Applicants were reckless as to the operation of the Act. This view is largely based on the assertion that there were flaws in the taxation advice provided by the tax agent and solicitor, which were so serious as to make their behaviour reckless as to the operation of the Act.
In this respect I note that there are a number of issues raised by the Respondent as to the advice provided, particularly in relation to the availability of rollover relief. Having considered the evidence before me, I am not in a position to comment in detail on the quality of the advice. However, the advice provided to the Applicant’s was reasonably detailed and although some aspects of that advice may be unclear and contrary views are possible, the providing of such advice cannot in my view be described as reckless. In other words that advice does not point to advisors who were so careless as to constitute behaviour, on their part, that could be described as gross carelessness. Two competent and well qualified valuers provided two completely different bases for making the required valuations and the supported valuations were a long way apart. Each valuation had some basis of support which was not unreasonable.
Consequently, I am of the view that the solicitor’s advice could not be described as reckless.
Overall I do not believe that the evidence supports a finding of recklessness by the advisors or the taxpayer and a more appropriate penalty in such a case is one imposed at a rate of 25% of the shortfall.
Finally, a question arises as to whether a complete remission should apply based on s 298-20(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the TAA 1963). That section was largely introduced so as to deal with cases that are not covered by the specific automatic remission provisions such as that contained in s 284-225(1) and (2).
The Commissioner’s discretion under s 298-20(1) is not limited by any explicit conditions or factors. Rather, the relevant factors are to be determined by implication from the subject matter, scope and purpose of the legislation: Picton Finance Ltd v FCT 2013 ATC 10-298 at 108-115.
A number of factors could be relevant including some or all of the following:
(a)The taxpayers compliance history;
(b)The taxpayers personal circumstances;
(c)The fact that the correct interpretation is an issue which is controversial or novel;
(d)The ATO has caused significant delay; and
(e)The tax shortfall amounts to only a timing difference and not a permanent reduction in tax.
It 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: Coppell v FCT 2000 ATC 2010. While the Applicants have made reference to the complexities involved in interpreting the application of the law to partnerships, they have not done so adequately in the context of this question.
In any event, I am not satisfied based on the facts as presented that there are grounds that would require a complete remission of the penalty based on s 298-20.
DECISION
The decisions under review in respect of the primary liabilities of the Applicants for the years ended 30 June 2005, 2007 and 2008 are affirmed.
The decision under review in respect of the liabilities of the Applicants for shortfall penalty for the years ended 30 June 2005, 2007 and 2008 is set aside and substituted with a decision that the penalty is set at the rate of 25%.
111. I certify that the preceding 110 (one hundred and ten) paragraphs are a true copy of the reasons for the decision herein of Deputy President R Deutsch.
.......................[SGD].................................................
Associate
Dated 27 June 2014
Date(s) of hearing 10 and 11 February 2014 Date final submissions received 25 February 2014 Counsel for the Applicant Mr I Young Solicitors for the Applicant Rubicon Lawyers Pty Limited Counsel for the Respondent Ms K Deards and Mr R Raffell Solicitors for the Respondent ATO Review and Dispute Resolution Practice
Table 1
Table 2
5
4
0