TRAVIATI And COMMISSIONER OF TAXATION

[2011] AATA 478

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 478

ADMINISTRATIVE APPEALS TRIBUNAL      )

)         Nos 2007/4451, 2007/4452

TAXATION APPEALS DIVISION		)
Re		MARIO TRAVIATI

Applicant

And COMMISSIONER OF
TAXATION

Respondent

DECISION

Tribunal Mr Frank O'Loughlin, Senior Member

Date8 July 2011

PlaceMelbourne

Decision In respect of penalty the objection decisions are set aside and instead the objections are allowed and penalty excised.

..................[signed].......................

Senior Member
TAXATION – Penalties – Reasonably arguable position – Reasonable care

Taxation Laws Amendment (Self Assessment) Bill 1992 (Cth) Explanatory Memorandum

Commissioner of Taxation v Malouf (2009) 174 FCR 581

Malouf v Commissioner of Taxation (2008) 250 ALR 253

Shin and Commissioner of Taxation [2010] AATA 1013

Walstern v Commissioner of Taxation 2003 ATC 5076

REASONS FOR DECISION

8 July 2011 Mr Frank O'Loughlin, Senior Member     

1.This matter concerns the appropriate penalty treatment to be afforded to an investor in retirement village projects of the same kind and financial structure that were the subject of review in Malouf v Commissioner of Taxation (2008) 250 ALR 253, Commissioner of Taxation v Malouf (2009) 174 FCR 581 and Shin and Commissioner of Taxation [2010] AATA 1013.

2.The applicant was an investor in two retirement village projects:

(a)the Windsor Gardens retirement village in the Melbourne suburb of Springvale in the 1999 year; and

(b)the Port Albert Gardens retirement village in the Melbourne suburb of Port Melbourne in the 2000 year,

(together the “Projects”).

3.The applicant was denied deductions for the unpaid contractual commitments to the Projects and was assessed to pay penalty at the rate of 25% of his tax shortfall for failure to take reasonable care.  The penalty was reduced to 5% because he made voluntary disclosures.

4.The issues before this Tribunal are whether:

(a)the applicant adopted a reasonably arguable position in claiming deductions for contractual commitments to pay money to purchase an interest in the retirement village projects (through a participation in a partnership) when the conditions precedent to the crystallisation of any objections to pay any money had not been satisfied;

(b)the applicant has met the reasonable care standard, such that no liability for penalty arises; and

(c)if the applicant is liable for penalty, whether the amount of penalty which remains ought be remitted.

5.The material facts concerning the commitment to the Projects are the same as in Malouf and Shin:

(a)the applicant agreed to participate in partnerships;

(b)the partnerships entered agreements for the construction and purchase of land and buildings that would comprise retirement villages;

(c)deposits were paid:

(i)$250,000 for the Windsor Gardens retirement village; and

(ii)$300,000 for the Port Albert Gardens retirement village;

(d)outstanding commitments were to be paid upon the land owner performing stipulated construction obligations:

(i)$750,000 for the Windsor Gardens retirement village; and

(ii)$900,000 for the Port Albert Gardens retirement village; and

(e)the partnerships claimed deductions  for the total of the deposit paid and the commitments to be met in the future, which produced partnership losses in respect of which the applicant claimed a deduction for his proportionate shares:

(i)$1,000,000 for the Windsor Gardens retirement village; and

(ii)$1,200,000 for the Port Albert Gardens retirement village;

(f)the Commissioner allowed deductions to the extent of the deposits paid; and

(g)the Commissioner imposed penalties for failure to take reasonable care.

6.Where the present applicant departs from the circumstances in Malouf is in relation to the extent to which he has demonstrated that he took appropriate advice. 

7.The present applicant asserts that he relied on advice from tax agents but has not provided the content of that advice.  The applicant’s tax agents assert that they considered the applicability of Taxation Ruling 94/24 before filing the applicant’s tax returns.

8.The Commissioner says that this differs from the circumstances in Malouf.   Mr Malouf was said to have received considered and careful advice.[1]  The primary judge in Malouf did not disclose the details or content of that advice and simply gave his conclusions.  All that can be said in differentiating between the present applicant and Mr Malouf is that in the present case there is insufficient evidence to form a view as to whether the advice was considered and/or careful.

[1]        Malouf v Commissioner of Taxation (2008) 250 ALR 253, paragraph 82.

9.What is apparent is that the question whether the unpaid contractual commitments constituted a loss or outgoing incurred either was not addressed in this consideration, or, if it was addressed, conclusions were, as it happened, erroneously reached that the unpaid contractual commitments were losses in outgoings incurred.

10.The applicant also obtained advice before entering the relevant transactions but has not provided the content of that advice to the Tribunal.

11.Whether there is a material difference between the position of the applicant and Mr Malouf in relation to advice received is not demonstrated on the evidence before the Tribunal.  Given the burden of establishing the penalties are excessive lies with the applicant, the necessary conclusion is that the present applicant has not established that he took the same care as appears to have been taken by Mr Malouf.

12.Given the conclusion concerning whether the applicant has adopted a reasonably arguable position and the impact that has on whether a taxpayer should be regarded as having taken reasonable care, it is not necessary to form a concluded view as to whether the advice taken by the applicant, on its own, constitutes taking reasonable care.

13.In relation to reasonably arguable position questions, the Commissioner contends that either:

(a)the question whether a taxpayer has adopted a reasonably arguable position is not to the point and that it is necessary to establish that reasonable care has been taken as an independent enquiry; or

(b)the applicant has not established that he took a reasonably arguable position.

14.The latter contention can be dealt with shortly.  If a taxpayer who adopts a position that finds favour with a judge of the Federal Court has not adopted a reasonably arguable position then it is difficult to conceive of a taxpayer who, whilst not adopting the correct position, has adopted a position that is reasonably arguable in the relevant sense.  By his own submission the Commissioner accepts that … whether a taxpayer has a reasonably arguable position involves the application of an objective standard which requires an analysis of the law and the application of the law to relevant facts ….  This submission is difficult to reconcile with the assertion that the applicant has not established that a reasonably arguable position has been taken.

15.Contrary to the Commissioner’s submission, the proper conclusion is that the applicant did adopt a reasonably arguable position and that position is evident upon an analysis of the admitted facts and the law that applied to those facts at the time the position was taken, a time before the Full Court decision in Federal Commissioner of Taxation v Malouf.  The applicant needs do no more than he has done to satisfy this standard.

16.The Commissioner’s contention that the reasonable care and reasonably arguable position tests are separate tests is based heavily on the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992.  It does not refer to the explanation of the hierarchy of the penalty provisions that was given when the reasonably arguable position test was introduced.

17.The Commissioner’s contention does not appear to be consistent with the policy underlying the penalty for failing to take reasonably arguable positions.  That policy was noted by Hill J in Walstern v Commissioner of Taxation 2003 ATC 5076  at [106] in the following terms:

Section 222C was introduced in 1992 as part of a number of amendments designed to improve the system of self-assessment. Among those amendments was s 226G which imposed by way of penalty additional tax equal to 25% of the tax which should have been paid where the taxpayer failed to take reasonable care to comply with the Act.  It is clear from the Second Reading Speech to the Taxation Laws Amendment (Self Assessment) Bill 1992, which introduced the amendments that while all taxpayers would be penalised if they failed to exercise reasonable care it was thought appropriate (apparently the initiative came from a study of experiences in the United States of America where a similar system operates) for taxpayers who made large claims, generally in excess of $10,000 to exercise greater care and thus to pay a greater penalty - a further 25%.  The Minister assisting the Treasurer, Mr Baldwin said, inter alia:

The whole idea of the new understatement penalties is to ensure that people do not get penalised when they have made an honest and genuine attempt to correctly determine their taxable income.

...

The government considers it appropriate that a more rigorous standard apply where the item at issue is very large. ... Where the interpretation of the law for such large items is in issue, we expect taxpayers to exercise more care; that is, the taxpayer must have a reasonably arguable position on the matter.

The crux of the standard is that taxpayers should not take positions at law which, at the time taken, are not about as arguable as an alternative position.  All said and done, the standard is about analysing the law and its application to the facts.  If there is a strong argument to support the taxpayer's position, that may be enough.  However, the Government does not want taxpayers to take positions which are not defensible or which do not have reasonable prospects of success.

18.The Minister did not suggest that failing to adopt a reasonably arguable position attracts an additional penalty.  The Minister’s explanation was that the reasonably arguable position was simply a higher standard that needs to be met where large sums are involved; the position adopted must be reasonably arguable, failing which the same level of penalty of 25% of the shortfall tax applies as would apply in cases of smaller shortfalls accompanied by a failure to take reasonable care.

19.Recognising the reservations expressed in Shin, the conclusion is that:

(a)the reasonably arguable position test is a higher standard to meet than the reasonable care standard; and

(b)if a taxpayer has adopted such a reasonably arguable position the reasonable care standard should be accepted as having been met.

20.That outcome is consistent with the remarks in the Second Reading Speech referred to above, that if a taxpayer comes to a conclusion that is reasonable then there should not be any penalty.  Coming to the same conclusion as a judge of the Federal Court, albeit one reversed on appeal, cannot be said to be an unreasonable conclusion.

21.If this approach is wrong then the question of remission arises.  The principles in Shin are equally applicable here and the appropriate conclusion is that it is appropriate to remit any penalty that would otherwise be applicable.

22.The decision of the Tribunal is that the objection decisions are to be set aside and instead the objections are allowed.

I certify that the twenty-two [22] preceding paragraphs are a true copy of the reasons for the decision herein of:
Mr Frank O'Loughlin, Senior Member

Signed: ..............................[signed]..........................................

Associate

Hearing on Papers  
Date of Decision  8 July 2011
Advocate for the Applicant       Mr Q. Pham, MDB Accountants
Advocate for the Respondent   Ms A. Smyth, ATO Legal Services