Coppell and Commissioner of Taxation [2000] AATA 70; (2000) 44 ATR 1001; 2000 ATC 2010 (4 February 2000)

Last Updated: 7 October 2009

DECISION AND REASONS FOR DECISION [2000] AATA 70

ADMINISTRATIVE APPEALS TRIBUNAL )

) No VT1999/35-37
TAXATION APPEALS DIVISION )

Re MARK COPPELL

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B. H. Pascoe, Senior Member

Date 4 February 2000

Place Melbourne
Decision The Tribunal affirms the decision under review.

........(Sgd) B. H. Pascoe............
Senior Member
CATCHWORDS
INCOME TAX – penalty tax – scheme to avoid tax – whether penalty excessive
Income Tax Assessment Act 1936
Case 3 99 ATC 134

REASONS FOR DECISION

4 February 2000 Mr B. H. Pascoe, Senior Member
1. This is an application to review a decision of the respondent to disallow objections against amended assessments of income tax for the years ended 30 June 1995, 1996 and 1997. The amended assessments had been issued as a result of an audit of the applicant's affairs and a determination that the provisions of Part IVA of the Income Tax Assessment Act 1936 ("the Act") applied to include, as assessable income of the applicant, income previously included as income of a trust.
2. At the hearing, the applicant was represented by Mr A. Riordan, a solicitor, and the respondent by an officer of the respondent. The Tribunal had the documents provided by the respondent pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 ("the AAT Act") and statements of facts and contentions filed by each party. Mr Riordan advised the Tribunal that no evidence would be led on behalf of the applicant who would not be arguing the substantive issue of the assessment of taxable income but solely the matter of the additional tax imposed pursuant to section 226 of the Act.
3. The basic facts which led to the issue of the amended assessments were set out in the statement provided to the Tribunal by the respondent pursuant to section 37 of the AAT Act. In July 1993, Mr Coppell was employed by a labour hire firm under a contract which provided for his services to be provided to Bank of Melbourne. He was paid a salary fortnightly and tax instalments were deducted. In June 1994, the contract was renewed for a further 12 months to June 1995. In June 1994, a company, Kunark Pty Ltd as trustee of the Mark Coppell Discretionary Trust, entered into an agreement with the labour hire firm to provide services to the Bank of Melbourne using Mr Mark Coppell. Until mid-August 1994, Mr Coppell continued to receive a salary from the labour hire firm but thereafter the income was regarded as that of the trust and a more modest salary was paid by the trust to Mr Coppell with a salary paid to his wife also. Motor vehicle and travel expenses were claimed as deductions by the trust. On 11 July 1997, the respondent wrote to Mr Coppell's tax agent regarding a program to review identified cases of alleged alienation of personal services income. Mr Coppell's name was on a list of clients attached to the letter which requested the tax agent to review the 1996 income tax returns with these clients and advise whether each client wished to amend. On 7 August 1997 the tax agent wrote to the respondent requesting an amendment to increase the income of Mr Coppell by $23,000 and reduce the income of Mrs Coppell by the same amount to reflect a reduction in salary claimed in respect of Mrs Coppell's services. The result of this request was a letter of 13 November 1997 from the respondent advising that an audit would be commenced and enclosing a questionnaire seeking information under 56 headings. That audit led to the amended assessments subject to this application.
4. Mr Riordan submitted that the approach of the respondent in this matter had led to the applicant incurring significant costs without an ability to negotiate a settlement. He said that the statement of facts and contentions filed and served by the respondent on 15 June 1999 set out a new and altered case by the respondent. This involved a reconsideration of the approach to be taken by the applicant with consequent costs of engaging a solicitor and counsel. Mr Riordan said that difficulties were met in obtaining details of compensating adjustments under section 177F(3) of the Act which were not included in the documents provided by the respondent under section 37 of the AAT Act. The primary argument of Mr Riordan was his inability to negotiate a settlement of the matter with the respondent. He said that any attempts to negotiate were met with the response that the officer of the respondent was not in a position to agree to any settlement but had to refer any proposals on to some unidentified officer or group. It was submitted that the attitude of the respondent made it impossible to negotiate any reasonable settlement of the dispute and, ultimately, the applicant could not afford the ongoing legal costs of the unsatisfactory and prolonged attempts at settlement. Mr Riordan argued that the only options left to the applicant were to withdraw his application for review of the objection decision or to seek to have the Tribunal review the quantum of penalty which, in Mr Riordan's submission, should be nil.
5. For the respondent, it was submitted that the applicant was put on notice of the possible application of Part IVA of the Act in July 1997 and that was an appropriate time at which negotiations could have taken place obviating the need for the application of Part IVA and taking advantage of concessional treatment of penalties available for taxpayers who were prepared to so negotiate. While defects in the documents supplied originally under section 37 of the AAT Act were acknowledged, it was submitted that the letter of 11 July 1997 showed that penalties of either 25% or 50% would be applied if assessments were amended by the respondent other than as a result of a taxpayer voluntarily amending the relevant income tax returns. It was said that, in this case, the applicant "chanced his arm, lost and paid the penalty". It was argued that there were no special circumstances which justified any reduction of the penalty imposed under section 226 of the Act. It was submitted that the penalty of 25% was the lower of the two levels of penalty under that section to be imposed where it is reasonably arguable that Part IVA does not apply. The auditor was said to have applied that lower level of penalty without conscious thought of whether the applicant had a reasonably arguable position.
6. It is reasonable to assume that Mr Riordan recognises that the Tribunal is placed in a very difficult position in dealing with this application. The Tribunal, standing in the shoes of the respondent, may exercise the discretion contained in section 227(3) of the Act to remit the whole or any part of the additional tax imposed by way of penalty by section 226. However, it is clear that there must be appropriate, special or extenuating circumstances to reduce the penalty imposed by the legislation under a specific provision. Such circumstances were found by the Tribunal in Case 3 99 ATC 134 where the penalty was reduced from 25% to 15%. However, this was after a full hearing of the substantive issue and evidence of the long history which gave rise to the relevant assessments. Here, there has been no evidence relating to the arrangement, no argument on the substantive merits of the assessment of primary tax to allow consideration of whether or not the applicant had a reasonably arguable position and no details of the history of the matter and the degree of cooperation of the applicant or his representatives. In essence Mr Riordan was arguing that, given appropriate cooperation from the respondent, he would have been confident of negotiating a settlement of the dispute but that cooperation was not forthcoming and his client ran out of money to fund prolonged legal costs. Whether or not he would have been successful in reaching a settlement satisfactory to the applicant is pure conjecture, particularly where the Tribunal has no evidence or argument relevant to the basis of the amended assessments.
7. Section 226 of the Act provides that, where a determination has been made under section 177F(1) of Part IVA and the amount of tax is greater than that which would have been assessable if no determination had been made, the taxpayer is liable to pay, by way of penalty, additional tax equal to the "penalty percentage" of that greater amount of tax. Subsection (2) of section 226 provides:

" 'penalty percentage' means:

(a) subject to paragraph (b) – 50%; or

(b) if it is reasonably arguable that Part IVA does not apply – 25%."
The best that Mr Riordan has been able to do is submit that there was a reasonably arguable position and, in the absence of what he described as a "process of obfuscation", the applicant may have been successful in reducing his liability by negotiation. At best, this may be justification for the lower penalty of 25% contemplated by the legislation under paragraph (b) of section 226(2). It is difficult to justify any further reduction when there is no evidence of the arrangement or of special circumstances of the arrangement or the history of the dispute which would indicate a level of penalty below that of having a reasonable argument. Whilst the Tribunal is prepared to accept that Mr Riordan was frustrated by the fact that the application was being dealt with by an officer in Hobart whereas the audit and amended assessments had been done through Moonee Ponds office and that officer did not appear to be able to negotiate directly, there is no evidence or assurance that any negotiations may have been successful in different circumstances. The Tribunal has no means to judge the strength, if any, of the applicant's position.
8. As a consequence and in the absence of evidence of special circumstances, the Tribunal is left with no option other than to affirm the decision to impose a penalty clearly contemplated by the legislation where it is reasonably arguable that Part IVA may not have applied or, possibly, not have applied in the way in which the respondent so applied those provisions.

I certify that the eight (8) preceding paragraphs are a true copy of the reasons for the decision herein of

Mr B. H. Pascoe, Senior Member

Signed: ........Lou Coffey..........................

Personal Assistant

Date/s of Hearing 5 October 1999

Date of Decision 4 February 2000

Solicitor for the Applicant Riordans

Solicitor for the Respondent An officer of the respondent