The Norwestern Trust and Commissioner of Taxation (Taxation)
[2017] AATA 361
•22 March 2017
The Norwestern Trust and Commissioner of Taxation (Taxation) [2017] AATA 361 (22 March 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2015/2226
Re:The Norwestern Trust
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Professor R Deutsch, Deputy President
Date:22 March 2017
Place:Sydney
The decision under review is affirmed.
.............................[sgd]...........................................
Professor R Deutsch, Deputy President
Catchwords
TAXATION – Goods and Services Tax – non-lodgement of BAS – notices of assessment issued - tax shortfall penalty assessment – administrative penalties - fraud and evasion – whether administrative penalties correctly imposed - whether Tribunal should exercise discretion to remit administrative penalty in whole or part – decision under review affirmed
Legislation
A New Tax System (Goods and Services Tax) Act 1999, ss 31-5, 31-8
Taxation Administration Act 1953, ss 105-5(1), 284-75, 284-90, 298-20
Cases
Australasian Jam Company Pty Ltd v Federal Commissioner of Taxation (1953) 88 CLR 23
Barripp v Commissioner of Taxation (NSW) (1941) 6 ATD 69
Bennett and Commissioner of Taxation [2015] AATA 455
Binetter and Commissioner of Taxation [2016] FCAFC 163
Denver Chemicals Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296
Dewheath Pty Ltd v Commissioner ofTaxation [2014] AATA 743
PNGR and Commissioner of Taxation [2013] AATA 942
Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483Sharkey and Commissioner of Taxation (2009) 66 ATR 878; [2009] AATA 1435
REASONS FOR DECISION
Professor R Deutsch, Deputy President
22 March 2017
On 7 May 2015, the Norwestern Trust (the Applicant) sought review in this Tribunal of the objection decision made by the Commissioner of Taxation (the Respondent) dated 21 December 2011 in which the Respondent disallowed in full the Applicant’s objection dated 8 September 2010.
The objection decision relevantly concerned:
(a)the assessment of net amount for the tax periods ending 31 December 2004, 31 March 2005, 30 September 2005, 31 March 2006 and 30 September 2008 (the Relevant Periods); and
(b)administrative penalties for the failure to lodge documents in those periods.
Background
The Applicant is a trust established by way of trust deed on 20 November 2000. Slava Sokolov and Ludmila Sokolov are the trustees of the Applicant.
The Applicant was registered for GST on 1 February 2001.
In late 2002, Dimitriy Sokolov and Ludmila Sokolov purchased land in the form of two adjacent properties located in Mona Vale in suburban Sydney.
The Applicant managed the construction of ten townhouses on the land. The construction was completed in or around September 2014.
The Applicant sold seven of the ten townhouses as follows:
·4 November 2004 – Unit 10 – $887,500.00 (T14-84)
·26 November 2004 – Unit 2 – $820,000.00 (T14-80)
·21 December 2004 – Unit 5 – $862,400.00 (T14-81)
·28 January 2005 – Unit 7 – $800,000.00 (T14-83)
·21 July 2005 – Unit 6 – $850,000.00 (T14-82)
·1 January 2006 – Unit 3 – $812,000.00 (T14-59)
·3 July 2008 – Unit 1 – $810,000.00 (T17-167)
All these sales fell within the Relevant Periods.
The Applicant lodged, within the requisite statutory deadline, Business Activity Statements (BAS) for the tax periods ending March 2002, June 2002, September 2002, December 2002 and March 2003, each of which recorded nil taxable supplies.
The Applicant did not lodge any further BAS within the requisite statutory deadlines in respect of the Relevant Periods or any other period until it lodged its BAS for the tax period ending June 2009.
There is no evidence showing that the proceeds of sale of the seven townhouses were reported by any other entity, although an unsubstantiated suggestion was made at the hearing that certain sales income had been disclosed by the two relevant trustees in their individual tax returns.
In total, there were 13 lodgment reminder letters sent by the Respondent to the Applicant in respect of some of the outstanding BAS, on the following dates:
·8 June 2007;
·1 September 2007;
·12 March 2008;
·14 June 2008;
·6 December 2008;
·25 March 2009;
·13 March 2010;
·18 June 2010;
·7 October 2010;
·10 February 2011;
·11 March 2011;
·30 July 2011; and
·22 September 2011.
Two letters were also sent by the Respondent to the Applicant on 6 December 2008 and 25 March 2009, relating to outstanding BAS in respect of the Relevant Periods.
At the hearing, the Respondent tendered another document being a further letter dated 30 September 2009 (Exhibit R4) which was headed ‘FINAL NOTICE’. This letter was sent by the Respondent to the Applicant, and required overdue activity statements for the Relevant Period to be lodged immediately.
Arising from the Applicant’s failure to lodge BAS for the Relevant Period, the relevant BAS were lodged by the Respondent, by default, on 5 July 2010 and were revised by the Applicant on 7 July 2011.
On 23 March 2010, the Respondent wrote to the Applicant and explained his intention to audit the Applicant in relation to the tax periods 1 July 2004 to 30 June 2009.
The audit was conducted because the Respondent held information that suggested the seven townhouses had been sold but the Applicant had failed to lodge BAS reporting the sales as taxable supplies. As part of that audit, the Respondent sought from the Applicant all relevant records pertaining to the sale of the seven townhouses. However, despite various reminders, the Applicant did not provide the requested materials.
On 12 July 2010, the Respondent finalised the audit without having received any documentation from the Applicant.
Critically, the audit:
(a)found that a number of townhouses were sold between 1 November 2004 and 31 July 2008;
(b)that the Applicant had failed to report those sales as taxable supplies;
(c)made a specific finding of fraud and evasion; and
(d)administrative penalties of 75 percent of the Applicant’s tax-related liabilities were imposed.
On 12 July 2010, the Respondent issued Notices of Assessment of net amounts (pursuant to s 105-5(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA)), for the Relevant Periods, in the amount of $531,081.
On 9 August 2010, Notices of assessments and liability to pay penalty were issued, in the amount of $398,310.75 (ie. 75 percent of the Applicant’s tax-related liability).
On or about 8 September 2010, the Applicant lodged an objection to the assessments of the net amount and the assessment and the liability to pay penalty.
On 21 December 2011, the Respondent issued a Notice of Objection decision.
At that stage, the Respondent did not allow the Applicant to use the margin scheme to calculate the GST owing on the sale of the townhouses, and determined that the assessments of administrative penalty were correctly made.
On the basis of further information subsequently provided by the Applicant, the Respondent has now accepted that the margin scheme did apply to the sales of the seven townhouses in question.
As a result, the Applicant’s net amounts and administrative penalties are now reduced as follows:
Audit/Assessment Tribunal Hearing Net Amount $531,081.00 $371,990.00
Penalties –
(75% of Net Amount)$398,310.75 $278,992.50 Total $929,391.75 $650,982.50 ISSUES
The following issues arise for determination in these proceedings:
(a)whether the finding of fraud and evasion is correct;
(b)whether administrative penalties were correctly imposed under s 284-75 of Sch 1 to the TAA; and
(c)whether the Tribunal should exercise the discretion, under s 298-20 of Sch 1 to the TAA, to remit the penalties in whole or in part.
Issue One
A finding of evasion was made in the audit decision, pursuant to s 105-5 of Sch 1 of the TAA, in relation to the tax periods between 31 December 2004 and 31 March 2006 (see T7-31-32). This finding is critical as the ability of the Respondent to recover tax is more constrained where there is no evasion.
The Applicant raises as an issue whether “the finding of evasion for the purposes of s 105-5 [is] correct”.
The Applicant bears the onus of disproving the evasion finding: Bennett and Commissioner of Taxation [2015] AATA 455 at [29]-[30]; affirmed Binetter and Commissioner of Taxation [2016] FCAFC 163 at [93]-[95] per Perram and Davies JJ. The Applicant has adduced no evidence to the Tribunal (and, in particular, sworn evidence from the trustees) in relation to the sale of the townhouses and the failure to lodge BAS. In the absence of any such evidence, it is difficult to see how the Applicant can discharge its onus.
“Evasion” is not defined by the taxation legislation.
However, the case law does provide some limited assistance in understanding the circumstances in which evasion is or is not present.
Thus, in Denver Chemicals Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296, Dixon J held (at 313):
...it means more than avoid and more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent that the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion” (emphasis added)
Further, In Australasian Jam Company Pty Ltd v Federal Commissioner of Taxation (1953) 88 CLR 23, Fullagar J observed (at 39) that:
there has been here more than a mere withholding of information which might or might not be relevant: I think that there has been an intentional withholding of information lest I should hold the company liable to tax to a greater extent than it was prepared to concede, and I regard this as ‘evasion’. (emphasis added)
In Barripp v Commissioner of Taxation (NSW) (1941) 6 ATD 69, Williams J held (at 72):
where a taxpayer makes a profit, which he knows to be taxable income and wilfully omits this profit from his income tax return, he would be guilty of evasion in the absence of some satisfactory explanation for the omission.
More recently, in PNGR and Commissioner of Taxation [2013] AATA 942 at [71], Senior Member McCabe observed:
the expression certainly refers to a situation in which a taxpayer consciously withholds information from the Commissioner or deliberately misstates other information in order to reduce the amount of tax which he or she is liable to pay.
The common thread that runs through these cases is that evasion arises in circumstances where a taxpayer has deliberately withheld information in order to extract some financial advantage through the non-payment of tax.
Significantly, it appears to be the case that the reason for non-lodgment of BAS in the Relevant Periods was so as to enable the Applicant to avoid incurring a taxation liability to the Respondent in respect of the taxable supplies made by it in the Relevant Period.
In a undated letter addressed to Trevor Kim of the Australian Taxation Office, the Applicant stated:
The trust did not have the funds to pay the GST when the sales were made because all the funds had to be paid to the Banks as required by the loans. The trust could not borrow any more funds, as the development did not have the equity for the trust to do so. The trust could not meet its GST obligations because of the change in the housing market and could not make the sales to obtain the funds needed to pay the GST. The trust did not intentionally avoid its GST obligations. The trust has actively over the years tried to sell the units in order to pay all debts. Due to the lack of funds the trust could not afford to have its accounts completed by an agent.
The circumstances in this matter suggest the Applicant was well aware of the need to lodge BAS. It was aware of the obligation to lodge BAS as evidenced by the fact that it did lodge BAS between March 2002 and March 2003.
It was also well aware that the sale of the seven townhouses would result in GST being payable to the Respondent as is evidenced in the letter addressed to Trevor Kim.
On the basis of the statements in that letter, it appears that the Applicant made a deliberate decision to apply the sale proceeds to service its loans rather than to discharge its GST obligations.
By not lodging BAS, the Applicant did not inform the Respondent of the taxable supplies it had made and accordingly represented, in effect, that it had no GST liability to the Respondent. That freed money to service the Applicant’s loans, which show that large loan repayments were made soon after the sale of the seven townhouses.
Accordingly, it appears that the Applicant consciously and intentionally withheld information from the Respondent (ie. it’s BAS and the making of taxable supplies) in order to reduce the amount of GST payable by it at that time (ie. to zero) - because it otherwise could not meet its financial obligations.
The Applicant had a significant period in which to rectify its failure to lodge BAS and disclose its taxable supplies to the Respondent. As set out above, the seven townhouses in question were sold between late 2004 and July 2008. Nonetheless, the Applicant failed to inform the Respondent of any of these sales until 2010, notwithstanding the fact that it received numerous BAS lodgment reminders.
The significant length of time prior to disclosure, which only occurred after the audit process had commenced, suggests the Applicant never intended to report its taxable supplies to the Respondent or meet its GST obligations.
Likewise, the Applicant’s ongoing failure to lodge BAS at all between June 2003 and June 2009 even in quarters in which no taxable supplies were made, despite having lodged BAS in 2002-2003, also suggests a conscious decision not to report its taxation affairs to the Respondent. These matters support a finding of evasion.
There is no evidence before the Tribunal to suggest the Applicant’s non-lodgment of BAS and non-payment of its GST was due to an oversight.
Further, the Applicant’s claim that it did not lodge BAS because of a lack of resources available to engage an accountant, or from a lack of accounting and taxation knowledge, cannot be accepted.
First, the Applicant had previously lodged BAS in 2002 and 2003 so the argument that it had a total lack of knowledge about such things is simply unsustainable.
Secondly, the cost of securing such services would not be substantial with so few transactions being involved.
Thirdly, there is no evidence to suggest that the Applicant contacted the Commissioner to explain its financial difficulties and seek assistance to meet its GST obligations, such as the possibility of entering into some form of payment plan.
Having regard to the above, the Tribunal is satisfied that the finding of fraud or evasion is made out.
Issue Two
Section 284-75(3) of Schedule 1 to the TAA provides:
You are liable to an administrative penalty if:
(a) you fail to give a return, notice or other document to the Commissioner by the day it is required to be given; and
(b) that document is necessary for the Commissioner to determine a tax related liability (other than one arising under the Excise Acts) of yours accurately; and
(c) the Commissioner determines the tax-related liability without the assistance of that document.
The Applicant failed to lodge its BAS for the Relevant Periods by the day each Activity Statement was required to be lodged: see s 31-5 and 31-8 A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act). Each BAS was necessary for the Commissioner to determine the Applicant’s net amount for the Relevant Periods, and the Commissioner determined the Applicant’s net amount without those BAS. Accordingly, the Applicant is liable to an administrative penalty under s 284-75(3).
The administrative penalty imposed is 75 percent of the Applicant’s tax related liability: s 284-90 (Item 7) (ie. 75 percent of the Applicant’s net amount payable in each of the Relevant Periods).
Issue Three
Section 298-20(1) of the TAA provides:
The Commissioner may remit all or a part of the penalty.
The legislation does not specify the circumstances in which the discretion under s 298-20 should be exercised. The question for the Tribunal is whether it is satisfied, having regard to the taxpayer’s particular circumstances, that it is appropriate to remit the penalty in whole or in part: Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483 at [249] per Griffiths J.
The Applicant bears the onus of showing there are factors that warrant remission: eg. Dewheath Pty Ltd v Commissioner ofTaxation [2014] AATA 743 at [3]; s 14ZZK(b) of the TAA.
The Tribunal has carefully considered all the relevant circumstances and concludes that remission is not appropriate either in whole or in part in this case.
There are a number of matters that suggest remission is not appropriate in this case.
First, the Applicant has not filed any sworn evidence in the Tribunal such as might have been provided by one or other of the trustees. Such evidence may have sought to explain the circumstances in which the failure to lodge BAS occurred and why it is appropriate for the penalty to be remitted.
Secondly, the Applicant’s failure to comply with its obligation to file BAS is consistent and long-term. In particular, the Applicant failed to lodge any BAS after March 2003 and until June 2009. The Applicant only itself lodged outstanding BAS for the Relevant Periods on 7 July 2011 after the Respondent had lodged BAS by default.
Thirdly, the Applicant’s failure to lodge occurred despite the Commissioner having sent the Applicant 13 reminder notices, commencing in June 2007.
Fourthly, the failure occurred in spite of the fact that the Applicant was aware of its obligation to file a BAS and demonstrably knew how to go about preparing and filing such, as it did between March 2002 and March 2003.
Fifthly, the Applicant’s failure to provide necessary information also extended to the audit and objection phases. In both instances, the Applicant repeatedly delayed providing documents to the Commissioner necessary to finalise the decision-making process.
Sixthly, the Applicant has effectively provided false or misleading information to the Respondent by failing to lodge BAS. The Applicant has presented by omission a misleading account of its affairs to the Respondent. By failing to lodge BAS which declared the taxable supplies made by the Applicant, the failure had the practical effect of representing to the Respondent that the Applicant had made no taxable supplies and hence had no GST liability to the Respondent. That was clearly an incorrect representation of its state of affairs.
Seventhly, the reason for non-lodgment of BAS appears to be so that the Applicant could avoid incurring a taxation liability to the Respondent and the obligation to pay it. It appears that the Applicant made a deliberate choice to apply the sale proceeds to service its loans rather than to meet its GST obligations. The Applicant’s election is a selective response to the business pressures it faced, in which the practical benefits or imperatives of its business activities has been afforded priority over its legal obligations to the Respondent and the proper operation of the taxation system. In these circumstances, as Senior Member Taylor observed, particularly compelling circumstances would be required before it would be appropriate to remit the penalties imposed: see Sharkey and Commissioner of Taxation (2009) 66 ATR 878; [2009] AATA 1435 at [39].
Eighthly, the reminder notices sent by the Respondent, each stated:
“If you are unable to pay the amount owing in full, you must still lodge your activity statements and phone us...to discuss your payment options”. (emphasis added)
There is no evidence suggesting the Applicant took any steps to arrange a payment plan with the Respondent on account of its alleged financial difficulties.
Ninthly, the Applicant’s claim that it did not lodge BAS because it had insufficient funds to engage an accountant should be rejected. There is no evidence before the Tribunal as to the Applicant’s financial affairs during the Relevant Periods and on which the claim could be accepted. Furthermore, it seems implausible that the Applicant could not afford an accountant to prepare a BAS, given that the BAS for each of the Relevant Periods would only involve reporting one, two or at most three taxable supplies.
Tenthly, the Applicant’s claim that it did not lodge BAS because of a lack of accounting and taxation knowledge and experience is inconsistent with the Applicant having lodged BAS in 2002 and 2003 (ie. before the Relevant Periods). The Applicant could also have contacted the ATO to obtain assistance with understanding its obligations - but there is no evidence it attempted to do so. Additionally, this explanation is inconsistent with that earlier advanced by the Applicant, namely that it was not able to pay GST because of financial pressures on its business.
Eleventhly, the Applicant makes reference both in the T-documents and verbally at the hearing to the stress caused to all relevant parties by the illness and subsequent death of Mr Sokolov’s father.
The Tribunal does not in any way doubt the veracity of the fact that Mr Sokolov’s father was ill and that his illness and death caused considerable stress to all concerned.
However, Mr Sokolov’s father became unwell sometime in the first half of the 2000s and passed away in 2006.
His illness and death might explain some of the early compliance lapses. However, there were in addition:
- 13 notices sent out by the Respondent to the Applicant between June 2007 and September 2011;
- two letters sent out by the Respondent to the Applicant dated 6 December 2008 and 25 March 2009; and
- a Final Notice letter dated 30 September 2009.
The death of Mr Sokolov’s father in 2006 cannot possibly explain the extent of the lapses in BAS compliance by the Applicant, having regard to the extent of these reminders and warnings beginning in June 2007 and carrying on until the end of September 2011.
Finally, the Applicant has adduced no evidence that it would suffer hardship if the penalties were not remitted.
The Tribunal finds that there are no grounds for remission, in whole or in part.
DECISION
The decision under review is affirmed.
I certify that the preceding 80 (eighty) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President
.................................[sgd].......................................
Associate
Dated: 22 March 2017
Date(s) of hearing: 24 February 2017 Advocate for the Applicant: Ms N Perederienico Counsel for the Respondent: Mr N Swan Solicitors for the Respondent: ATO Review and Dispute Resolution
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