The Applicant and Commissioner of Taxation

[2006] AATA 210

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 210

ADMINISTRATIVE APPEALS TRIBUNAL          № VT2004/161‑165

TAXATION     APPEALS         DIVISION

Re:            THE APPLICANT

Applicant

And:         COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal:       Mr B.H. Pascoe, Senior Member

Date:8 March 2006

Place:Melbourne

Decision:The Tribunal varies the decisions under review to the extent of reducing the additional tax or penalty in respect of each of the years ended 30 June 1998 to 30 June 2002 inclusive from 50 per cent to 25 per cent of the tax shortfall in each year.

In accordance with reg 19AA(9) of the Administrative AppealsTribunal Regulations, the Tribunal certifies that the proceedings have terminated in a manner favourable to the applicant.

(sgd) B.H. Pascoe

Senior Member

INCOME TAX – deductions claimed for staff welfare fund expenses – whether amended assessment valid – whether avoidance of tax due to fraud or evasion – additional tax or penalty – whether recklessness – whether failure to take reasonable care

Income Tax Assessment Act 1936 ss 170, 226G, 226H

Taxation Administration Act 1953 ss 284‑75, 284‑90 of Schedule 1

Kajewski v Commissioner of Taxation 2003 FCA 258

REASONS FOR DECISION

8 March 2006  Mr B.H. Pascoe, Senior Member

1.      These applications are for review of decisions of the respondent's to disallow objections to amended assessments of income for the years ended 30 June 1998 to 30 June 2002 inclusive.

2.      At the hearing, the applicant was represented by Mr P. Soloman of counsel and the respondent, Commissioner of Taxation, was represented by Ms D. Harding of counsel.  Evidence was given by Mr and Mrs G, the two directors and equal shareholders of the applicant and the principal directors and shareholders of the real estate company in which the expenditure in issue arose.

3.      The amended assessments arose from the disallowance of certain deductions claimed by R Pty Ltd as trustee of the G Unit Trust (Unit Trust) and described as payments to the B Employee Welfare Fund.  G Pty Ltd, as trustee of the G Family Trust (Family Trust) was the sole unit holder of the Unit Trust for the years ended 30 June 1998 to 30 June 2000; a 58 per cent unit holder for the year ended 30 June 2001 and a 50 per cent unit holder for the year ended 30 June 2002.  The applicant was a beneficiary of the Family Trust and, pursuant to the trust deed and resolution of the Trustee, was entitled to the balance of income for the years ended 30 June 1998 to 30 June 2001 and 96.64 per cent of the income for the year ended 30 June 2002.

4.      The deductions claimed by R Pty Ltd and disallowed were:

year ended 30 June 1998 – Staff Welfare Fund Expenses          $500,000

year ended 30 June 1999 - Trustee Fees   $2550,           Interest   $25,000

year ended 30 June 2000 - Trustee Fees     $500,           Interest   $25,100

year ended 30 June 2001 - Trustee Fees     $500,           Interest   $25,000

year ended 30 June 2002 - Trustee Fees     $500,           Interest   $25,000

As a consequence of the disallowance of these expenses claimed and the consequent increases in the net income of the Unit Trust and the Family Trust, the applicant had included as assessable income by the amended assessments the following amounts:

year ended 30 June 1998  $500,000

year ended 30 June 1999  $27,550

year ended 30 June 2000  $25,600

year ended 30 June 2001  $14,790

year ended 30 June 2002  $12,344

5.      Notwithstanding a paucity of documentary evidence supporting the transactions involved, a brief outline of the arrangement entered into in June 1998 appeared to be:

·   United Overseas Credit Ltd, a Hong Kong company, made a loan of $500,000 to Mr and Mrs G. The lender's recourse was limited to the proceeds of insurance policies on the lives of Mr and Mrs G.

·   Mr and Mrs G lent $500,000 to R Pty Ltd, apparently interest free.

·   R Pty Ltd paid $500,000 to National Welfare Trust (New Zealand) Ltd as trustee of the B Employee Benefit Trust.

·   National Welfare Trust (New Zealand) Ltd paid $500,000 to European Grande Assurance SA, based in Mauritius, for life policies on the lives of Mr and Mrs G.

·   National Welfare (New Zealand) Ltd assigned the life policies to United Overseas Credit Ltd as security for the loan.

6.      In the year ended 30 June 1998, R Pty Ltd claimed a deduction for the $500,000 and in each of the four subsequent years of income, claimed deductions for interest payable to United Overseas Credit Ltd and trustee fees payable to National Welfare Trust (New Zealand) Ltd.

7.      Subsequent to the alleged establishment of the Employer Benefit Trust, R Pty Ltd entered into an arrangement with its employees under which an employee with more than one year's employment could claim reimbursement of up to $115 per quarter for medical and related expenses.  In each of the years ended 30 June 1999 to 30 June 2003 inclusive reimbursements of between approximately $2500 and $5500 were made to between 9 and 14 employees.  According to the evidence of Mrs G, the method of reimbursement was that she would calculate the amount, pay the total into an Australian bank account of the Trustee, fax the details to New Zealand and, shortly thereafter, each staff member would receive a cheque in Australian currency drawn on a New Zealand bank.  It is not clear why this somewhat convoluted method was adopted as the alleged fund and trustee served no purpose other than to have the money pass through two bank accounts on its way from R Pty Ltd to the employees.

8.      This whole structure was established on the advice of R Pty Ltd's accountant, Mr Lewis, at a meeting in May 1998 with Mr and Mrs G.  A Mr Cox was also present and Mrs G recalled that he had an office in Brisbane and was associated with the New Zealand trustee company.  In her evidence, she said that $500,000 was the minimum amount that could be contributed.  This amount would be contributed to the fund for the purpose of purchasing life insurance bonds for herself and her husband; and the sum would be loaned from a Hong Kong entity.  Mrs G was told that the arrangement was approved by the Australian Taxation Office (ATO).  In mid-June 1998, Mr G, when on holiday in Queensland, met a Mr Stephen Hart in Brisbane at the suggestion of Mr Lewis.  He again explained the transactions involved and assured Mrs G that the arrangement had ATO approval and clearance by a senior barrister.

9.      At the hearing, Mr Solomon did not seek to pursue the issue of deductibility of the expenditure disallowed.  Given the circular alleged movement of funds and no apparent business or income earning nature of the claimed expenditure, it would appear to be an appropriate concession.  The expenditure disallowed did not appear to serve any business purpose of R Pty Ltd and it could be said that the only motivation for the alleged expenditure (if it can be said that it was, in fact, expenditure) was the tax savings sought to be achieved.

10. The only issues sought to be argued by Mr Solomon were that the amended assessment for the year ended 30 June 1998 was invalid and the additional tax of 50 per cent by way of penalty was excessive. It was said that the amended assessment for 1998 was not valid pursuant to s 170(2) of the Income Tax Assessment Act 1936 (the 1936 Act), having been issued more than four years after the date on which tax became due and payable under the original assessment.  Having conceded that the relevant expenditure claimed was not an allowable deduction, it was accepted that there had been an avoidance of tax; but it was argued that there was no fraud or evasion.  It was also argued that Mr and Mrs G had relied on the advice of their professional advisor, had acted honestly and were clear and frank in their evidence.

11.     While there was no evidence that Mr Lewis was a promoter of schemes or that Mr Hart was actively involved in promoting the arrangement to Mr and Mrs Green, it is clear that Mr Lewis must have been aware of the details of the arrangement and the unlikeliness of the alleged expenditure giving rise to an allowable deduction.  In Kajewski v Federal Commissioner of Taxation (2003) FCA 258, Drummond J was dealing with a similar matter and argument; and said (at para 114):

To enliven the power to amend an assessment under s 170(2)(a), the Commissioner only has to be of the opinion that an avoidance of tax is due to fraud or evasion. There is no justification for implying a limitation on these clear words to restrict the Commissioner's power under the provision to amend an assessment only where the avoidance of tax is due to fraud or evasion by the taxpayer personally. The wording of s 170(2)(a) is apt to empower the Commissioner to issue an amended assessment where an avoidance of tax is due to the fraud or evasion of the taxpayer's agent engaged to prepare returns signed by the taxpayer and to lodge those returns on the taxpayer's behalf, as Hart did here for Askena and the applicants. Tax agents whose registration as such is controlled by Pt VIIA the ITAA 1936 are recognised by the Act as entitled to perform a range of functions on behalf of their taxpayer principals in respect of their tax affairs, including the preparation and lodging of taxpayers' returns. For example, by s 251L, a registered tax agent is entitled to charge fees for a wide range of services rendered to taxpayers in connection with their tax affairs. This legislative recognition of the role of tax agents is an additional reason for giving the words of s 170(2)(a) their ordinary meaning. Nor can it be said there is any absurdity involved in so construing the sub-section. The notion that a principal may be held responsible for the fraudulent conduct of an agent, even though ignorant of the agent's fraudulent behaviour is not a novel one: it is well established at common law. It is not necessary that the principal should authorise or even know of the fraudulent act of the agent to be liable for it. "It is enough that the agent has been put by the principal in a position to do the class of acts complained of": see Colonial Mutual Life Assurance Society Ltd v The Producers and Citizens Co-Operative Assurance Co of Australia Ltd (1931) 46 CLR 41 at 46. If this were a common law fraud case, it could be said that, as between the applicants and the Commissioner, the applicants put Mr Hart in a position to do the class of fraudulent acts complained of by accepting his advice about the employee retention plan arrangements, leaving it to him to implement those arrangements in circumstances where they expected the arrangements to generate a tax benefit and retaining Mr Hart as their tax agent.

In this case, Mr Lewis was the tax agent, not Mr Hart, although it seems clear that the same Mr Hart was influential in the preparedness of Mr and Mrs G to enter into the arrangement.

12. While it might be said that the applicant, as the ultimate beneficiary through the imposition of two trusts, was a passive party in relation to the arrangement, the avoidance of tax was the result of evasion by R Pty Ltd; and it is relevant that the same tax agent was involved in both entities and the guiding minds of both entities in Mr and Mrs G were identical. It follows that I am satisfied that the amended assessment for the year ended 30 June 1998 was valid pursuant to s 170(2)(A) of the 1936 Act.

13. The remaining question is that of the rate of additional tax by way of penalty. In each year a rate of 50 per cent of the tax applicable to the additional income was imposed. Given the findings in this matter and the acceptance on behalf of the applicant that the expenditure claimed was not allowable as a deduction, it is unnecessary to consider the relevant penalties provided by the legislation where Part IVA applies. Consequently, the penalty applied by the respondent was under s 226H of the 1936 Act in respect of the years ended 30 June 1998 to 30 June 2000 inclusive and under s 284‑75; and Item 2 of s 284‑90 of Schedule 1 to the Taxation Administration Act 1953 (the TA Act) in respect of the years ended 30 June 2001 and 30 June 2002. Under both provisions, the additional tax or penalty of 50 per cent applies where a tax shortfall was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the operation of a taxation law. A lower rate of 25 per cent applies where the shortfall resulted from a failure of the taxpayer or registered tax agent to take reasonable care to comply with a taxation law. (Section 226G of the 1936 Act, Item 3 of s 284‑90 of Schedule 1 to the TA Act.) While I hold the view that the tax agent was or should have been well aware of the deductibility of the amounts claimed was not available, I accept the evidence of Mr and Mrs G that they accepted and relied on alleged professional advice. However, it must be said that they too readily accepted that advice and accepted the claim being made for Staff Welfare Fund Expenses in the year ended 30 June 1998 while being aware that, in the words of Mrs Green, the amount was for the purpose of purchasing life insurance bonds for [Mr G] and me.  As such, I am satisfied that the two directors failed to take reasonable care.  While the actions of the tax agent certainly bordered on recklessness, I am prepared to find that the rate of additional tax or penalty should be that applicable to failure to take reasonable care.  Consequently, the rate should be reduced to 25 per cent of the tax shortfall in each of the years in question.

14.     It follows from the foregoing that the decisions under review should be varied to the extent of reducing the additional tax or penalty in respect of each of the years ended 30 June 1998 to 30 June 2002 inclusive from 50 per cent to 25 per cent of the tax shortfall.

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

Clerk

Date of Hearing:  14—15 November 2005

Date of Decision:  8 March 2006
Counsel for the applicant:            Mr P. Solomon
Solicitors for the applicant:          Herbert Geer & Rundle
Counsel for the respondent:        Ms D. Harding

Solicitors for the respondent:       Australian Government Solicitor