VT2004/246 and Commissioner of Taxation

[2005] AATA 1028

Administrative

Appeals

Tribunal

 

 

DECISION AND REASONS FOR DECISION [2005] AATA 1028

ADMINISTRATIVE APPEALS TRIBUNAL        Nº VT2004/246

TAXATION ADMINISTRATIVE DIVISION

Re:         VT2004/246

Applicant

And:       COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal:       Mr B.H. Pascoe, Senior Member

Date:             18 October 2005

Place:            Melbourne

Decision:The Tribunal sets aside the decision under review and, in its stead decides that the objection by the applicant should be allowed to the extent of reducing the penalty for having a tax shortfall from 75 per cent to 50 per cent of such shortfall.

The Tribunal certifies that proceedings have terminated in a manner favourable to the applicant

(sgd) B.H. Pascoe
  Senior Member

TAXATION – Goods and Service Tax – claim for input credits to which applicant not entitled – purchase of residential units – claim for credits in more than one period – reclaim after review advised not allowable – whether intentional disregard of a taxation law – whether tax shortfall resulted from recklessness

Taxation Administration Act 1953

REASONS FOR DECISION

18 October 2005  Mr B.H. Pascoe, Senior Member

1.      This is an application to review a decision of the respondent disallowing an objection lodged by the applicant against the assessment of a penalty for having a tax shortfall amount in relation to Goods and Services Tax ("GST") for the quarters ended 30 June2003 and 30 September 2003.  The shortfall arose from the over‑claiming of GST credits totalling $98,269 and a penalty at the rate of 75 per cent of $73,701.75 for intentional disregard of the law was imposed.

2. At the hearing the applicant, M Pty Ltd, was represented by Mr M. Flynn of counsel. The respondent was represented by Ms C. Mavroudis of counsel. Evidence was given by Mr S, the managing director of M Pty Ltd, and his wife. The respondent called five officers of the respondent. Pursuant to s 14ZZE of the Taxation Administration Act 1953 (the TA Act) the applicant requested that the hearing be in private.

3.      M Pty Ltd is an incorporated company carrying on the business of property development.  It is registered for GST and accounts on a quarterly cash basis.  During the three months ended 31 March 2003, it purchased three properties, all of which appeared to be single units of three blocks of units. Tax invoices were obtained showing the following amounts:

Purchase Price         GST Included

January 2003           S Street                   400,000  36,363.63

March 2003              w Street                   444,190  26,615.03

March 2003              M Avenue                632,500  34,318.18

4.      In its quarterly return for the period to 31 March 2003 M showed purchases of $1,044.601 which appeared to consists primarily of the properties at S Street and M Avenue, and claimed input credits of $71,782.  Following an enquiry by the respondent, the company was informed by letter of 11 June 2003 that there was no entitlement to an input credit of $70,681 and a notice of assessment giving effect to this change was issued on 17 June 2003.  No penalty for the incorrect claim was imposed.

5.      In its quarterly return for the period to 30 June 2003, lodged on 4 July 2003, the company showed purchases of $363,636 which appeared to be the property at S Street and claim input credits of $36,596.

6.      In a quarterly return lodged by Mr S personally for the period to 30 June 2003, input credits of $26,615 were claimed on the basis of having purchased the property at W Street.  The date of lodgement is unknown, but by letter dated 28 October 2003, Mr S was advised by the respondent that he was not entitled to such credit.  Again no penalty was imposed.

7.      On 18 November 2003, the company lodged its quarterly return for the period to 30 September 2003.  That return showed purchases of $1,076,690, being the properties at W Street and M Avenue, and claimed input credits of $61,693.

8.      The respondent commenced a review of the company's returns and, on 22 March 2004, the respondent advised that the completion of the review had resulted in additional GST of $98,629, being the total input credits for the six months ended 30 September 2003 incorrectly claimed and the imposition of a penalty equal to 75 per cent of the incorrect claim.  The resulting assessments were the subject of the objection and the consequent application to the Tribunal.

9.      Mr S said that he was advised by his solicitor to obtain tax invoices for the three properties purchased and that input credits could be claimed.  He said that he was uncertain as to the correct treatment in relation to such purchases, and he made three telephone calls to the enquiry number of the Australian Taxation Office ("ATO") in May 2003.  On each occasion he was told that an input credit could be claimed if he had a tax invoice; was the first purchaser of the property and the vendor had not applied the margin scheme.  He said that he became confused after receipt of the letter of 11 June 2003, as he had been given two different answers.  Mr S said that he made the further claim in the June return on the basis of the telephone advice from the ATO.

10.     Mr S said that he claimed the input credit on his person return in relation to the purchase of the property at W Street, because it was purchased in his own name, not that of the company.  He could not recall why the tax invoice in respect of that property was in the name of M Pty Ltd. He could not explain why the input credits in relation to that same property was claimed in the company return for a different period.  Neither could he explain why input credits in relation to the same properties were claimed in at least two separate returns nor why the gross purchase price was shown in one return and a price net of GST was shown in another return.  His best explanation was that he was confused by apparently conflicting advice and his understanding that credits could be claimed up 18 months of purchase.

11.     The wife of Mr S was unable to provide much assistance in her evidence.  She assists Mr S in his work and was aware that he had made several telephone calls to the ATO.  She attended a meeting with the ATO auditor in February 2004.  She said that they were informed that a penalty of 75 per cent normally applied only where a taxpayer did not co‑operate.

12.     The ATO auditor, who conducted the audit of the returns lodged by M Pty Ltd between January and March 2004, gave evidence.  He had previously audited the personal return of Mr S for the quarter ended 30 September 2003 and, after disallowing the input credit claimed, accepted that the shortfall arose as the result of an honest mistake and could be regarded as isolated.  He was then not aware of the earlier disallowance of the input credit claimed by M Pty Ltd in the March 2003 quarter, which had resulted in the letter of 11 June 2003.  The auditor said that, during a meeting with Mr S on 5 February 2004, Mr S advised him that it was believed that the returns were correct.  Contrary to the assertions by Mr S in his evidence, the auditor maintained that Mr S had told him that claims for the purchase of property at the same address in returns for different periods, related to different units in the same block of units.  He said that Mr S resiled from that contention at a subsequent meeting on 12 February 2004.

13.     A compliance verification officer within the GST business line at the ATO gave evidence that he authorised the refund in relation to the return for the quarter ended 30 June 2003 of M Pty Ltd.  He did not believe that he had contacted the company and there was no record of any such contact.  He said that he would have been aware of the amendment to the March 2003 return, but assumed that the company would not have repeated the error explained in the letter dated 11 June 2003.

14.     A product officer in the business solutions unit of the small business line at the ATO gave evidence that he could not recall, nor had any record of a conversation alleged by Mr S to have taken place on 12 May 2003.  Whilst he accepted that it was possible that he gave the advice alleged by Mr S to have been given, the system normally requires queries in relation to GST on residential properties to be transferred to a technical specialist in the client contact area.

15.     A former technical specialist in the ATO small business call centre gave evidence that she was the only "Sonia" at the centre in May 2003, when Mr S alleged that he had spoken to a "Sonia".  She could not recall any conversation in that month with Mr S.  She said that it was not the practice to fax material to an enquirer, but she accepted that it was possible that she had faxed an extract from a ruling on supply of residential premises as alleged by Mr S.

16.     A customer service representative in the ATO small business call centre recalled having a conversation with Mr S, but not the date of the conversation or the question posed.  As he had later overheard some colleagues discussing Mr S and M Pty Ltd, he recalled having that conversation.  It was accepted that the answers noted by Mr S may have been given during that conversation.

17.     It was accepted by the applicant that there was no entitlement to the input credits claimed and subsequently disallowed.  However, it was submitted that the law in relation to such entitlements was complex; and that Mr S had gone to considerable effort to obtain an answer.  The Tribunal was urged to accept that he believed there was an entitlement to the input credits when claimed.  Mr Flynn acknowledged that, with hindsight, there were "some oddities" in the way in which the claims were made.  However, it was submitted that reasonable care was exercised and, as no refund was made in relation to the September 2003 quarter, there was no loss of revenue in relation to that period.

18.     It was submitted for the respondent that M Pty Ltd demonstrated an intentional disregard of the taxation law in the preparation of its June and September 2003 returns; because it knew it was not entitled to claim the input credits in respect of the three properties.  It was said that the applicant was aware of the correct application of the law by the letter of 11 June 2003 and the notice of assessment which followed.  In addition, it was said that, prior to lodging the company's September 2003 return, Mr S had received the letter of 21 October 2003, advising that no input credit was available on the acquisition of residential property as claimed by him personally.  Notwithstanding this, he claimed the same credit in relation to the same property in that September 2003 return.  It was further alleged that Mr S deliberately lied to the auditor at a meeting on 5 February 2004 in saying that the properties were different units of the same block of units. 

19.     Ms Mavroudis argued that it was unreasonable for the applicant to contend that it had made a genuine or adequate attempt to comply with its obligations when it ignored the written advice of 11 June 2003; but allegedly proceeded on the basis of telephone advice prior to that date.  It was submitted that, if Mr S had believed the decision conveyed in the 11 June 2003 letter to be incorrect, he would have contacted the author of the letter, which the letter invited him so to do, or objected to the assessment.  Neither of these occurred but, rather, claims in relation to the same properties were made in subsequent returns.

20.     It is relevant to note the contents of the letter of 11 June 2003.  It confirmed a telephone conversation of 10 June 2003 and stated:

…

The outcome of the revision is that your net amount of GST credit is to be reduced by $70,681, resulting in a net amount of GST payable.

The letter sets out the right of objection and invited Mr S to contact the author on a specific telephone number if he wished to discuss the matter further.  Attached to the letter was the following statement:

Why we have made this decision:

Under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) you are entitled to input tax credits on your creditable acquisitions.  A creditable acquisition is simply the purchase, supply or acquisition of something to be used in carrying on your enterprise.

However under paragraph 2(a) of section 11‑15 of the GST Act, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

As the two properties purchased were for the purpose of making input taxed supplies (residential premises) you are not entitled to claim input tax credits on these transactions.

Your BAS will be revised to reflect the above.

The Tribunal notes that, to a person unskilled in the law of GST and its application to the purchase of residential premises, this explanation would not be readily understood.  A level of understanding would not have improved significantly with the information given to Mr S in the letter to him of 28 October 2003 with the result of the review of his personal return for the June 2003 quarter.  Under the heading "Why we have made this decision", the first two paragraphs were similar to those in the 11 June 2003 letter.  The next two paragraphs then stated:

Paragraph 9 of GSTR 2003/3 states that the sale by registered entities of residential premises such as houses and units is input taxed, subject to two exceptions (being commercial residential premises and new residential premises).

Paragraph 24 of GSTR 2003/3 and subsection 40‑75(1) of the GST Act define new residential premises as residential premises that have not previously been sold as residential premises and have not previously been the subject of a long‑term lease.

It is possible that confusion could have arisen in the mind of Mr S between these statements and the alleged oral advice in telephone enquiries as a result of the definition of "new residential premises".

21. Section 284‑20 in Schedule 1 of the TA Act sets out the percentage of the tax shortfall amount to be applied by way of penalty. It provides for penalty amounts as follows:

·   75 per cent of the tax shortfall amount where such shortfall resulted from intentional disregard of a taxation law by the taxpayer or the taxpayer's agent.

·   50 per cent of the tax shortfall where it resulted from recklessness by the taxpayer or the taxpayer's agent as to the operation of a taxation law;

·   25 per cent of the shortfall amount where it resulted from a failure by the taxpayer or the taxpayer's agent to take reasonable care to comply with a taxation law.

22.     While there is clear concern at the motives of Mr S in claiming input credits in relation to the same properties in different returns, particularly after a formal disallowance by the respondent, I am prepared to give some benefit of doubt as to whether it could be said to have been "intentional disregard of a taxation law".  There is no doubt that there was a failure to take reasonable care.  On balance, I am satisfied that the conduct of accepting the non‑allowance of input credits after review by the respondent and, subsequently, claiming the same credits in a subsequent period can be regarded as reckless.  The two disallowances of the credits claimed were not subject to penalty, apparently on the basis that the claims were an isolated honest mistake.  Whilst the reasons for the disallowances may not have been clear to the applicant and some confusion may have existed, it was rash and wilfully careless to claim the same credits in subsequent periods.  The New Short Oxford Dictionary defines reckless as: "Heedless of the consequences of one's action or of danger, incautious, rash".  The Macquarie Dictionary 2^nd Ed defines it as:  "utterly careless of the consequences of action, without caution". In the circumstances of this case, I am satisfied that the shortfall amount resulted from recklessness of the applicant by its managing director and the appropriate penalty under s 284‑90 in Schedule 1 of the TA Act is 50 per cent of the shortfall amount.

23.     As a consequence of the foregoing, the objection decision under review should be set aside and, in its stead, a decision made that the objection should be allowed to the extent of reducing the penalty for having a tax shortfall amount from 75 per cent to 50 per cent of the tax shortfall.

I certify that the twenty‑three [23] 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:  8 August 2005

Date of Decision:  18 October 2005
Counsel for the applicant:            Mr M. Flynn
Solicitor for the applicant:            Nil
Counsel for the respondent:        Ms C. Mavroudis

Solicitor for the respondent:        Australian Taxation Office Legal Practice