The Study and Prevention of Psychological Diseases Foundation Incorporated and Commissioner of Taxation (Taxation)

The Study and Prevention of Psychological Diseases Foundation Incorporated and Commissioner of Taxation (Taxation) [2017] AATA 377 (27 March 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number: 2012/2088
Re:The Study and Prevention of Psychological Diseases Foundation Incorporated
APPLICANT

AndCommissioner of Taxation
RESPONDENT

DECISION
Tribunal:Deputy President I R Molloy

Date:27 March 2017
Place:Brisbane

The revocation of each endorsement has effect from 1 January 2005.
............................[Sgd]............................................
Deputy President I R Molloy
CATCHWORDS
TAXATION – remittal from Federal Court - revocation of endorsements – effective date of revocation – revocations should be retrospective
LEGISLATION
Taxation Administration Act 1953 (Cth)
CASES
The Study and Prevention of Psychological Diseases Foundation v Commissioner of Taxation [2013] AAT 919
The Study and Prevention of Psychological Diseases Foundation v Commissioner of Taxation [2015] FCA 1117
REASONS FOR DECISION
Deputy President I R Molloy
27 March 2017

This proceeding came before me for hearing of the application for review on 22 and 23 October 2013. The issues were (a) whether the applicant was entitled to certain endorsements, and if not (b) whether the endorsements should be revoked including if relevant the effective date of revocation.
In my decision[1], on 20 December 2013, I found that that the applicant, The Study and Prevention of Psychological Diseases Foundation Incorporated (“SPED”), was not entitled to the endorsements, and confirmed the respondent’s decision to revoke the endorsements retrospectively.
[1] The Study and Prevention of Psychological Diseases Foundation v Commissioner of Taxation [2013] AAT 919
The applicant appealed to the Federal Court to have that decision set aside and the proceeding remitted to the Tribunal to be heard and decided again. The appeal succeeded in part.
On 21 October 2015, the Federal Court found that I had failed to consider certain of the applicant’s submissions in determining the effective date of revocation, and ordered that the matter be remitted to the Tribunal limited to that issue.[2]
[2] The Study and Prevention of Psychological Diseases Foundation v Commissioner of Taxation [2015] FCA 1117
Specifically, order 1 of the Federal Court was that the decision of the Tribunal be set aside and remitted to be heard and decided again only as to the question of the effective date of revocation of the endorsements with reference to the submissions made by the applicant before the Tribunal to that question.
Order 2 of the Federal Court specified that the Tribunal’s consideration of the question in order 1, was to be undertaken according to the existing evidence admitted by the Tribunal in the course of the proceeding before it, with no further evidence to be taken, subject to order 3.
Order 3 allowed the Tribunal to take further evidence, to the extent that there is any question alive before the Tribunal of uncertainty concerning correspondence or other matters relevant to the effective date of revocation.
At the hearing on the remittal neither party sought to adduce further evidence. It was agreed that the effective date of each endorsement was 1 January 2005.
Under section 426-55(1) of the Taxation Administration Act1953 (“TAA”), where an entity is not entitled to an endorsement, the Commissioner of Taxation (“the Commissioner”) (and on review the Tribunal) has a discretionary power to revoke the endorsement.
Under sub-section (2) the revocation has effect from a day specified by the Commissioner (or the Tribunal) which may be a day before the decision to revoke.
On this hearing there are three matters the applicant submits should be taken into account in determining the effective date of revocation of the endorsements. They are, in summary:
(a)The applicant acted compliantly, transparently, honestly and in good faith in its dealings with the respondent;
(b)An auditor who undertook an audit of the applicant commencing in 2009 approached her task with a pre-conceived view and lacked impartiality in respect of both the audit and related matters; and
(c)The respondent (and now the Tribunal), in exercising the discretion, is required to take into account the Tax Payers’ Charter and Compliance Model which set out obligations of the respondent in circumstances where a taxpayer has acted truthfully, compliantly and in good faith.
In respect of the first submission SPED points out that it applied for the endorsements in December 2004[3] and they were granted in June 2005.[4] SPED engaged a not-for-profit specialist accounting firm to obtain advice on the best accounting structure and record-keeping procedures to ensure it was compliant with all reporting obligations as well as structuring itself in the best manner appropriate for a non-profit and Deductible Gift Recipient (“DGR”) endorsed entity. This appears from the evidence of SPED’s public officer and treasurer, Anna Dupont.[5]
[3] Supplementary T-documents, S1.
[4] Supplementary T-documents, S6.
[5] Statement of Anna Lucia Dupont, paragraph 61.
Ms Dupont explained that after obtaining the endorsements SPED sought further advice and information regarding, amongst other things, its method of record-keeping of research expenses based upon its research methodology, activities and endorsements. Ms Dupont described a Business Activity Statement (BAS) audit in May 2006. This she said involved a review of SPED’s endorsements to ensure ongoing eligibility. During this audit, she said, she was involved in meetings and phone conversations with both the auditor and a not-for-profit technical specialist for the Australian Tax Office (“ATO”). She said she provided the auditor with documentation relating to SPED’s research and activities. She said her intent was to ensure overall compliance. She said SPED also made further enquiries of an ATO not-for-profit technical specialist, after completion of the audit, with respect to the structure of the Gift Fund and other matters to ensure compliance with ATO requirements. She said that after the 2006 audit was completed, she felt more secure that SPED was structured and administered in a compliant manner in accordance with its tax obligations.[6]
[6] Ibid, paragraphs 62 to 73. See also Transcript, pages 131 – 134.
The 2006 BAS audit was finalised in February 2007. In April 2007 SPED was notified of a review of its endorsements. Ms Dupont responded but nothing more was heard about a review at the time.
Two years later in October 2009 SPED received notification of a Tax Concession and DGR Audit.[7] Ms Dupont said that from the commencement of the audit, SPED communicated to the auditor its aim to comply with her requests. Ms Dupont says she believed SPED always did so within the relevant time-frames, or sought extensions when required.[8] Ms Dupont said:
Early in the audit we suggested the best way for the auditor to review the activities of the research was to come and visit our research and see it in action. We made repeated invitations for the auditor to visit programs we were conducting and also to view and participate in the research. We considered this a simple and effective way of verifying the activities of SPED without a great deal of written correspondence backwards and forwards.[9]
[7] Statement of Anna Lucia Dupont, paragraph 80.
[8] Ibid, paragraph 81
[9] Ibid, paragraph 82. See also paragraph 94.
SPED submits that these invitations show SPED was acting transparently. SPED submits it has always displayed honesty and transparency, revealing its activities to the respondent. It submits the aim to be compliant was important to SPED and it has done the right thing. For these and the other reasons advanced on behalf of SPED, it submits that it acted honestly, transparently, compliantly, and in good faith in its dealings with the respondent.
The respondent submits that the Federal Court found that this submission on behalf of the applicant had been adequately dealt with by me previously. It points out that the Federal Court, at paragraph 159, recounted that SPED on the hearing of the appeal submitted that I had failed to consider and make findings on the three matters referred to above. The respondent submits that, particularly at paragraphs 218 and 220 of its decision, the Federal Court found that I had not made any reference to the second and third submissions, that is, the contentions concerning the auditor and the documents and whether SPED had discharged any obligations cast upon it for the purposes of those documents. The respondent submits the finding of the Federal Court was that SPED was entitled to have those two submissions addressed, but that the first submission had been adequately dealt with previously.
The applicant also points out that the Federal Court said, at [220]-[221]:
In the absence of at least some reference to the applicant’s submissions concerning, particularly, the contentions in relation to the auditor and the two nominated documents in the context of SPED’s contentions of compliance with what was required of it, an inference arises that those matters were not considered by the Tribunal.
SPED is entitled to have those matters addressed in the exercise of the Tribunal’s statutory review function.
The Federal Court, however, in dealing with the first submission, identified six propositions said to amplify that submission. The second of those was described by the Federal Court at paragraph 209 as follows:
The second is that SPED had acted honestly, compliantly and transparently in all its dealings with the Commissioner since its initial application for endorsements in 2005. The Tribunal does not address, expressly, the relevance of the contention that SPED acted honestly, compliantly and transparently in its dealings with the Commissioner in terms of whether that consideration weighs properly in the balance in determining whether revocation should take effect from the earliest date should it be demonstrated that the relevant entity was not entitled to the endorsements from the date on which they were granted.
I think this observation, notwithstanding those parts of the Federal Court decision relied on by the respondent, justify the applicant advancing at this stage what has been described above as its first submission. I also note that the actual orders of the Federal Court do not contain the limitation suggested on behalf the respondent.
Consequently, I do not think there is anything precluding SPED making the submission referred to above at this stage.
The respondent, in respect of this submission, also points out that in my original decision I found, at paragraph 74:
SPED’s actual activities do not coincide with the stated objects in its Constitution. It does not fulfil the charitable purposes it asserts. It exists, and existed during the relevant years, for the benefit of its small number of members. A considerable part of that benefit is financial, although I suspect not evenly shared.
The respondent also points to my findings, at paragraphs 84 and 86, that SPED’s activities, in particular its principal activity, was not at any time to promote the prevention or control of diseases in human beings, relevant to its DGR endorsement and exemption from fringe benefits tax. The respondent submits these matters create a hurdle which SPED cannot overcome, and are findings it cannot set aside or side-step.
SPED, however, submits that it “wholly accepts” the findings relevant to its entitlement to the endorsements. I understand its submission is made on that basis. My previous findings, for example, as to SPED’s actual activities relative to the objects in its Constitution, and who benefitted, remain relevant considerations. SPED’s submission, as I understand it, is there are other or further matters, for instance its dealings with the respondent as outlined above, which should also be taken into account in determining the effective date of revocation.
I have had regard to the material referred to by SPED in respect of its first submission, and intend to take that material and SPED’s submission into account.
SPED’s second submission is that the auditor who undertook the audit commencing in 2009 pre-judged the situation and failed to act impartially both in respect of the audit and related matters. First SPED points to minutes of a conversation between the auditor and another ATO employee. The minutes were obtained through Freedom of Information (FOI) legislation.
The other employee is recorded as saying “…there must be a promoter behind the scheme as the entity and people behind it could not possibly come up with such arrangement on their own.”
SPED submits that this meant the auditor came to the audit with pre-conceived views. There was, SPED says, no promoter and no scheme. SPED also relies on another document obtained through an FOI request, which is said to detail the auditor’s conclusion that SPED should not be eligible for endorsement.[10] SPED also relies on the auditor’s failure or refusal to accept invitations to observe, or to take part in, SPED’s activities.
[10] Supplementary T Documents, S10, page 129.
After the audit SPED received default assessments under s 167 of the Income Tax Assessment Act 1936. SPED refers to the reasons of the auditor for issuing these assessments. It claims that those reasons contained misrepresentations. The reasons are set out in detail in SPED’s Reasons for Objection.[11] At the same time as the default assessments issued (without prior notice to SPED), SPED’s endorsements were revoked retrospectively, a decision was made to apply penalties at the highest rates, and a decision was made to backdate General Interest Charges (GIC) from the date the endorsements were first awarded.
[11] Reasons for Objection, Item 8,pages 165 – 169.
On 27 November 2011 SPED objected to the penalties and requested remission of the GIC. The objection was upheld, with all penalties remitted in full and GIC remitted until 3 May 2011, thereafter applying a Shortfall Interest Rate only.[12]
[12] Reasons for Objection, Item 9, pages 131 – 155.
The respondent submits that the auditor’s role is irrelevant in respect of the issue now before me. The respondent makes the point that I am not reviewing the auditor’s decision.
The applicant acknowledges that the Tribunal’s role is not to review the auditor's decision. However, it contends the prejudice of the auditor is “implicitly relevant” to the decision now to be determined under review because:
(a)the auditor's decision, on behalf of the respondent, for retrospective revocation was made at the same time as other decisions proven to be incorrectly made, including the imposition of penalties at the highest rate (which upon objection were reduced to NIL) and GIC (which were remitted in full);
(b)the auditor grossly misrepresented facts in her decision to impose default assessments as well as her decision not to provide notice to the applicant of her decision to issue default assessments , as she was required to do;
(c)the auditor’s revocation decision was contrary to ATO policy including the Taxpayers’ Charter and the Compliance Model;
(d)the auditor’s approach, representation of the facts and her position has informed the respondent's current position and characterises the ongoing approach to this matter. The respondent's position, informed by the auditor, is being propagated to the Tribunal with an aim of persuading the Tribunal to find in favour of the respondent's position; and
(e)therefore, the Tribunal may consider both the inherent unreliability of information contended by the respondent as well as the unfair treatment of the applicant, by the respondent in this matter.
Specifically, in respect of the date of revocation of the endorsements, SPED contends, amongst other things:
(a)The actions of the auditor, including applying punitive penalties, backdating GIC, misrepresenting the facts, issuing default assessments, failing to provide notice of issuing default assessments and revoking the endorsements retrospectively were all made on a prejudicial basis.
(b)The auditor made such catastrophic errors with respect to her decision on penalties and GIC and stark misrepresentations throughout her decisions, that there should be concern about relying upon other findings made by her throughout the audit, in the Tribunals consideration of the retrospective revocation.
I have considered all of SPED’s submissions. I am conscious of SPED’s criticisms of the auditor’s decisions and, of course, that some of those decisions were reversed or modified by later decisions of the respondent. However, as both parties submit, I am not reviewing a decision of the auditor. Similarly I am not influenced by any of her decisions. I do not think the conduct or decisions of the auditor have much relevance at all to my decision on the effective date of revocation of the endorsements. Accordingly, they do not weigh significantly in my considerations.
SPED’s third submission is that in deciding the effective date of revocation the decision-maker is obliged to conduct itself by reference to two particular publications, the Taxpayers’ Charter and Compliance Model, which outline the respondent’s obligations to treat taxpayers fairly and reasonably and to make fair and equitable decisions in accordance with the law.
SPED again relies on its history of honesty, compliance and transparency in its dealings with the respondent particularly as referred to in Ms Dupont’s evidence. SPED submits among other things that it has fulfilled its requirements according to the compliance model by acting truthfully, maintaining all requisite records, and taking reasonable care.
SPED refers in particular to the Foreword to the Taxpayers’ Charter which sets out the aim of the respondent in the exercise of its duties. It also emphasises the words of the Introduction, and the description of Taxpayer rights, including the right to expect to be treated fairly. It submits that it has complied with the obligations incumbent on SPED as a taxpayer.
The applicant repeats, as examples of its efforts at compliance and care, seeking appropriate expert advice, making enquiries of the respondent’s non-profit specialist, taking action to find the outcome of the 2007 review, its invitations to the 2009 auditor to view its research, and complying with requests and directions of the respondent.
SPED refers to the respondent’s Compliance Model, in particular the progressive scale of compliance. SPED contends the evidence, including the evidence relied on in support of its first submission above, demonstrates the highest level of compliance.
SPED submits that in the circumstances retrospective revocation of the endorsements is not the appropriate or fair response where SPED has shown, it submits, a willingness to the do the right thing and worked with the respondent transparently from the commencement. I accept that I should take into account the Taxpayers’ Charter and the Compliance Model. I also accept that SPED in its dealings with the respondent, and in matters such as attention to record-keeping, and engagement of specialists, acted as described by Ms Dupont.
It remains, however, that SPED’s activities did not coincide with its stated objects and, as I have found, it did not fulfil the charitable purposes it asserted. It existed during the relevant years for the benefit of its small number of members. These matters concerning SPED’s actual activities and financial affairs strongly influence my decision on the effective date of revocation.
Taking all the facts, matters and circumstances into account, that is to say, including those referred to in my original decision, and SPED’s submissions as referred to above, I am of the view that the revocation of each of SPED’s endorsements should be retrospective and take effect from 1 January 2005.
I certify that the preceding 42(forty-two)
paragraphs are a true copy of the reasons
for the decision herein of Deputy President
I R Molloy
………………[Sgd]…………………………………
Associate
Dated 27 March 2017
Date of Hearing  27 January 2017
Solicitor for the Applicant  Ms Emma Salerno
Counsel for the Respondent  Mr Vince Brennan
Solicitor for the Respondent  Mr Scott Reeve

[2017] AATA 377

27 March 2017

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