Waldeck and Commissioner of Taxation
[2012] AATA 848
•3 December 2012
[2012] AATA 848
Division TAXATION APPEALS DIVISION File Numbers
2012/2591
2012/2592
Re
Ben Waldeck
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Bernard J McCabe
Date 3 December 2012 Place Brisbane The objection decision is varied so that the entire amount of the penalty is remitted. The decision is otherwise affirmed.
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Senior Member Bernard J McCabeCATCHWORDS
TAXATION – Pay as you go tax – Whether applicant was an employee – Distinction between contract of service and contract for service – Administrative Penalties – Want of reasonable care – Seeking professional advice – Penalty remitted in full – Decision otherwise affirmed.
LEGISLATION
Taxation Administration Act 1953 (Cth) ss 18-15 and 298-20.
CASES
Hobart Central Childcare Pty Ltd and Federal Commissioner of Taxation [2005] AATA 1027.
Archibald Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Commissioner for Taxation [2008] FCAFC 54.
REASONS FOR DECISION
Senior Member Bernard J McCabe
3 December 2012
Ben Waldeck is the applicant in these proceedings. He worked for a firm on the Gold Coast for approximately 18 months during the course of the years of income ending on 30 June 2009 and 30 June 2010. The firm did not withhold Pay As You Go (PAYG) amounts from Mr Waldeck’s pay while he worked there. When Mr Waldeck prepared his returns for those years of income, he referred to the amounts he believed should have been withheld and he was assessed on that basis. It did not take long for the Commissioner to establish the firm had not been withholding amounts in respect of a PAYG liability. The firm claimed it did not withhold payments because Mr Waldeck was an independent contractor rather than an employee. The Commissioner issued amended assessments and levied administrative penalties equal to 25% of the shortfall in each year because the Commissioner concluded the false statements in Mr Waldeck’s return were the result of a want of reasonable care.
Mr Waldeck said at the hearing that he was not challenging the assessment apart from the decision to impose the penalty at a rate of 25% and the decision not to remit the amount of the penalty. His concession came after the Commissioner’s representatives pointed out jurisdictional problems: I was told I did not have jurisdiction to deal with the assessment in so far as it referred to the PAYG credits because there were no objection rights under Part IVC of the Taxation Administration Act 1953. I accept that is so. These proceedings focused on the decision to impose the administrative penalty and the decision not to further remit the penalty that had been imposed.
The administrative penalty was properly imposed, but I am satisfied the whole of the penalty should be remitted. I explain my reasons below.
THE FACTS
Mr Waldeck worked for a business trading as “Infolink” on the Gold Coast. Infolink was a web design and internet promotion business. It was conducted by Interactive Entertainment Australia Pty Ltd. That company was run by a Mr and Mrs Klerck. Mr Waldeck had specialist skills in the area, and he was looking for part-time work while he completed his university studies nearby. His appointment to head “all operations of Infolink IT” was announced on the firm’s website on 15 July 2009 (exhibit 5) although I understand Mr Waldeck commenced work there much earlier in the year.
The nature of Mr Waldeck’s engagement is attended by some uncertainty. Mr Waldeck agrees he provided invoices on several occasions at the start of his time at Infolink in which he charged for his work, which is consistent with him being an independent contractor. But he said he had a conversation in May 2009 about his status after questions arose in relation to his pay. In an email exchange on 6 May 2009, Mr Klerck said the firm was considering “bringing you on to the books as an employee” although there was also reference to the possibility of Mr Waldeck taking equity in the business.
Mr Waldeck said Mr Klerck did not ever definitively say the applicant was appointed as an employee, but nor did he offer him shares in the business. Mr Waldeck said his pay arrangements settled into a regular pattern where he was paid a fixed amount each week. That is consistent with him being an employee. He acknowledges he did not receive superannuation and it seems he did not receive holiday pay: that is consistent with him being an independent contractor. But the website acknowledges Mr Waldeck as an integral part of the firm who played an important management role. In a webpage reproduced in exhibit 5, the applicant is described as “a member of the Infolink family”. He is identified as a manager on the website and provided with a business card that identified him as “operations manager” (exhibit 2).
These representations to the world at large would almost certainly have had the effect of clothing Mr Waldeck with the authority of a manager. Anyone viewing that website would have assumed he was a senior employee. But Mr Waldeck was aware of the ambiguous nature of the relationship he had with the firm. He acknowledged in the hearing that he long suspected the firm was not withholding PAYG amounts. He said he did not want to make a fuss seeking clarification because he did not want to lose his job. He also said he held off filing tax returns because he was unsure how to account for what he was being paid.
After some delay, Mr Waldeck consulted Mr Lovell, a university friend who had recently been admitted as a solicitor. Mr Lovell gave evidence at the hearing. He said he provided advice that (a) Mr Waldeck was in an employment relationship with the firm, and (b) the firm should have been withholding amounts in respect of PAYG.
I think Mr Lovell’s advice was right. It can sometimes be difficult to distinguish between contracts of service and contracts for service. In this case, I think the relationship was properly characterised as a contract of employment because of:
(a)the degree of control which Mr Klerck exercised over Mr Waldeck (Mr Waldeck said Mr Klerck sat near him in the office and directed him on how to do his job); and
(b)The extent to which Mr Waldeck was integrated into the very fabric and structure of the business (he was the operations manager who was responsible for directing the staff).
With the assistance of Mr Lovell, Mr Waldeck prepared tax returns for the 2009 and 2010 years of income. Mr Waldeck and Mr Lovell prepared the returns on the basis that the PAYG withholdings had in fact been set aside as they believed the employer was required to do. It is apparent they misunderstood the effect of s 18-15(1) of Schedule One to the Taxation Administration Act 1953 which says:
An entity is entitled to a credit equal to the total of the amounts withheld from withholding payments made to the entity during an income year if an assessment has been made of the income tax payable, or an assessment has been made that no income tax is payable, by the entity for the income year.
This provision means a taxpayer is only entitled to the benefit of a credit in respect of withholdings where amounts have actually been withheld. It is not enough in a case like this that the amounts should have been withheld, although that is how the applicant approached the problem.
I am told there were a number of conversations with the ATO Help Line about how the applicant should proceed in reporting his income. I was provided with transcripts of four conversations, including conversations that occurred on 16 September 2011 and 29 November 2011: exhibit 7. The dates are significant because the returns were lodged on 14 November 2011. In the course of the first conversation, Mr Waldeck told the call centre operator that his employer was denying Mr Waldeck was an employee and insisting he was an independent contractor, and that the employer had refused to provide payment summaries. Mr Waldeck also said (at p 1):
I get the feeling they just want to avoid the responsibility and … and if you don’t mind me using my bad language, that ‘I don’t want to pay anyone’s f’ing tax’…
The operator advised the applicant to complete a declaration, which was not really a helpful response as the applicant was not simply saying his employer had failed to provide a PAYG payment summary – he was saying (albeit in a roundabout way) that the employer had not being withholding PAYG amounts.
Mr Waldeck repeated his concerns more clearly in the further conversation on 29 November. Mr Waldeck said (at p 2):
And then I worked for an employer and he didn’t withhold tax for me, and, you know – and I was working there for a while and I kept asking him and then he basically fobbed me off and said ‘I’m not paying it’ or whatever. So I had to fill in, like, statutory declarations as well. So…
Later in the same conversation (exhibit 7 at p 3 of the transcript of the call of 29 November 2011), he noted he had sent in two statutory declarations with his returns “to say that an employer – a previous employer didn’t withhold tax”.
ASSESSING THE ADMINISTRATIVE PENALTY
The applicant did make a false statement in his return. That false statement resulted in a tax shortfall. He was advised by a lawyer in relation to the return, which was prudent, but it also means more is expected of the applicant. (The fact the applicant is personally blameless is beside the point: he is visited with mistakes made by his representative.) The true effect of s 18-15 of the Schedule to the Act was misunderstood. A person – especially a person with professional advice – taking reasonable care in preparing his return would not have made that mistake. I do not see how I have any choice but to affirm the objection decision to impose a 25% penalty.
SHOULD THE PENALTY BE REMITTED?
I note the Commissioner has already remitted part of the penalty. The applicant says the whole of the penalty should be remitted pursuant to s 298-20 in Schedule One to the Act.
The power to remit is not qualified. It is available to address a situation where there are mitigating circumstances that suggest a taxpayer should be dealt with more leniently, provided that can be done without undermining the system: see Hobart Central Childcare Pty Ltd and Federal Commissioner of Taxation [2005] AATA 1027 per DP Forgie at 205.
The power to remit was discussed by the Full Federal Court in Archibald Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Commissioner of Taxation [2008] FCAFC 54. In that case, the Court explained the Tribunal was permitted to look to the circumstances of the taxpayer and determine whether the imposition of the penalty was harsh in all the circumstances: see Dixon at [20] per Spender, Ryan and Emmett JJ.
I think the imposition of the penalty in this case would be harsh in all the circumstances. The applicant made a good faith attempt in the phone calls to the Helpline to work out what he should do. While he should have approached the problem differently, it was not irrational for him to ring the Helpline and seek advice about his predicament. The phone calls were made as the returns were being prepared and lodged. The advice he received was not very helpful, most obviously because the operators did not appear to appreciate the full import of the disclosures that were being made. I do not think they should be criticised for that; it was simply a misunderstanding. But if he had been given different advice after making the disclosures, he would presumably have dealt with the problem in a different way, perhaps avoiding the penalty.
Having been honest in his disclosures, it would be harsh to impose a penalty for doing something that the Commissioner’s officers might have stopped the applicant from doing. There is no purpose served by imposing the penalty, and the system is not undermined if the penalty were remitted.
CONCLUSION
The objection decision is varied so that the entire amount of the penalty is remitted. The decision is otherwise affirmed.
I certify that the preceding 22 (twenty -two) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe. ........................................................................
Associate
Dated 3 December 2012
Date of hearing 31 October 2012 Applicant Self-represented Counsel for the Respondent Mr S Munic Solicitors for the Respondent ATO Legal Services
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