Martinazzo and Commissioner of Taxation [2009] AATA 61; (2009) 72 ATR 169 (30 January 2009)

Administrative Appeals Tribunal

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Martinazzo and Commissioner of Taxation [2009] AATA 61 (30 January 2009); (2009) 72 ATR 169

Last Updated: 3 November 2010

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 61

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2007/1166-1167

TAXATION APPEALS DIVISION		)
	Re		GIOVANNI MARTINAZZO

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Mr A Sweidan, Senior Member

Date 30 January 2009

Place Perth

Decision

The Tribunal affirms the decisions under review.

sgd. A Sweidan.
Senior Member

CATCHWORDS

INCOME TAX - whether amounts purportedly paid to applicant as "advances in the nature of loans" were income - whether wages or salary - whether applicant liable for penalties - decisions under review affirmed

LEGISLATION

Income Tax Assessment Act 1997, s 6-5

Taxation Administration Act 1953, s 284-75

CASES
The Federal Coke Company Pty Ltd v FC of T [1977] FCA 3; 77 ATC 4255
McLaurin v FC of T [1961] HCA 9; (1961) 104 CLR 381
MIM Holdings Ltd v FC of T [1997] FCA 363; 97 ATC 4420
FC of T v The Myer Emporium Ltd [1987] HCA 18; 87 ATC 4363
FC of T v Dixon [1952] HCA 65; (1952) 86 CLR 540; 10 ATD 82
Squatting Investment Co Ltd v FC of T [1953] HCA 13; (1953) 86 CLR 570
Reuter v FC of T 93 ATC 5030
Hayes v Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47
Brown v Commissioner of Taxation [2002] FCA 318
Christie v Federal Commissioner of Taxation [1956] HCA 20; (1956) 96 CLR 59 Scott v Federal Commissioner of Taxation [1966] HCA 48; (1966) 117 CLR
Black v FC of T 86 ATC 4113
DFC of T v Black 90 ATC 4699
Arnett & Ors v. FC of T 98 ATC 2137; (1998) 39 ATR 1095
Case 1/2002 [2002] AATA 291; 2002 ATC 101; (2002) 49 ATR 1189
Walstern v. Commissioner of Taxation [2003] FCA 1428; 2003 ATC 5076; (2003) 54 ATR 423,
Pridecraft Pty Ltd v. Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; (2004) 58 ATR 210
Commissioner of Taxation v Archibold Dixon [2007] FCA 1079

REASONS FOR DECISION

30 January 2009

Mr A Sweidan, Senior Member

BACKGROUND

1. Paragraphs 1 -15 of the Tribunal’s decision in application no’s 2007/2049-2051 and 2007/2056-2057 by Thomas and Anna Martinazzo are incorporated by reference, and should be read as forming part of this decision.

ISSUES

2. Whether amounts paid to the applicant in the years ended 30 June 2003 and 2004 (the years in dispute) by MMH and CRT are assessable pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 97).
3. Whether the applicant is liable to administrative penalties pursuant to subsection 284-75(1) or alternatively subsection 284-75(2) of the Taxation Administration Act 1953 (TAA), and whether the administrative penalties assessed to the applicant should be remitted pursuant to subsection 298-20(1) of the TAA.

FACTS

4. The following facts are not in dispute:
5. Prior to the years in dispute the applicant worked in the “family” crane and plant hire business and was employed by the relevant operating entity carrying on the business. He was paid salary and wages from which tax instalments were deducted.
6. In the year ended 30 June 2002 the applicant ‘received a wage of about $895 per week net of taxes’ (Exhibit A1 paragraph 6). MMH’s wages book shows regular weekly net payments (after the deduction of tax) of $895 to the Applicant for the period 19 March 2002 to 7 May 2002 (GMSD p158).
7. At paragraph 2 of Exhibit A1, the applicant states that in the 2003 and 2004 years he continued to receive a fixed and regular weekly amount of $895 and that these payments were in the nature of a loan.
8. In the year ended 30 June 2003 the weekly amount of $895 was paid by MMH (a total of $46,540 for the year). In the year ended 30 June 2004 it was paid by:

8.1 MMH for the period July to December 2003 (a total amount of $20,585 – see MMH cash breakup sheets at GMSD p89-115).

8.2 CRT for the period December 2003 to June 2004 (a total amount of $25,955 - see CRT cash breakup sheets at GMSD p116-147).

9. The payments from MMH to the applicant in the years in dispute were (together with payments made to other family members) described in the MMH accounts as ‘wages’ and debited to an account called ‘Loan – TG&A Martinazzo’ which had a credit balance of $345,000 as at 1 July 2002. (MMH General Ledger for the period 1/7/02 to 30/6/03 at GMSD p151. MMH Balance Sheet as of June 2002 at GMSD p153.)
10. The payments from CRT to the applicant in the year ended 30 June 2004 were (together with payments made to other family members) described in the CRT accounts as ‘wages’ and were debited to the account called ‘Loan – Martinazzo Family’ which had an opening balance of nil at 1 December 2003 and a debit balance of $73,700.26 at 30 June 2004. (CRT General Ledger for the period 1/12/03 to 30/6/04 at GMSD p148. Balance Sheet for CRT as of June 2004 at GMSD p150.)
11. On 20 September 2006, the accounting firm Roper Hoey sent a facsimile message to the respondent attaching what are described as ‘draft financials for the Crane Rental Trust (2005 with comparitives)’ with the comment that ‘we realised some discrepancies and we are still trying to track things down’ (GMSD2 pp.216-230 at p217).
12. The ‘draft’ balance sheet for 30/6/2005 has the comparative figures for 30/6/2004 which are different to the balance sheet originally provided (GMSD p150). The ‘Loan – Martinazzo Family’ account is the same with a debit balance of $73,700.26 at 30/6/2004. It is described in the Notes to the accounts as ‘Beneficiary Loans’. There are now loan accounts for Thomas and Anna Martinazzo who have loaned $233,979 each to CRT. However, there is no loan from the applicant to CRT as at 30/6/2004.
13. In Exhibit A1 at paragraphs 6 - 9 the applicant refers to ‘a meeting with our accountant sometime about July 2002’ at which the ‘tax treatment of payments to family members’ was discussed. The document referred to in paragraph 8 in which this matter was ‘addressed and summarized’ is a facsimile message from the accountant Mr Hoey to ‘Tom & Anna’ dated ‘24/7200’ (sic) (CD pp.267-268).
14. At paragraphs 6 and 9 the applicant refers to large amounts loaned to the business by his parents ‘or entities related to them’ and says his parents agreed to allow him to withdraw some of these contributed amounts to ‘substitute for wages’. At paragraph 9 he says it was agreed we (family members) would ‘take advances in the nature of loans to us in lieu of wages’, and ‘that with Tom & Anna’s permission (which they gave) that these advances would be reduced against their loan accounts’, and that ‘these advances could also be offset against possible distribution of profit from family trusts’.
15. At paragraph 7 he states that the accountant (Mr Hoey) indicated that this may reduce income tax, payroll tax and make the financial statements look better.
16. At paragraph 11 he says that he advised the bookkeeper (Mr Armstrong) that he wished to have superannuation contributed for him by the business at a similar rate to that which he would have received if he had still been receiving a salary. (See also GMSD p160-161 for a printout from the respondent’s records of the surchargeable superannuation contributions made on the applicant’s behalf for the 2003 year.)
17. The applicant during the course of his evidence was cross-examined about the weekly payments of $895. He stated that he was ‘pretty sure’ that they came off the partnership loan account and while he initially said there was a possibility he would have to repay his parents, when he was asked whether he genuinely believed he would ever have to repay anyone he said ‘I didn’t believe I would have to pay it, no’. (Transcript p45).
18. The applicant also conceded that he was not in fact sure whether he had loaned any money to MMH (Transcript p46).
19. In relation to the period when the weekly payments were made by CRT he stated that there had been some loans from him to CRT (Transcript p46).
20. The applicant also stated that the work he was doing in the business in 2003 and 2004 was the same as he was doing before that time. In response to questions about why he was paid in 2003 and 2004 he said it was ‘just for my living expenses’ (Transcript p43) but later conceded that ‘I was getting the money because I was going to work’ (Transcript p45). Earlier he had implied that he was being paid for being a director (‘I don’t know what it’s called when a director gets paid’ – Transcript p40).
21. Mr Hoey was cross-examined about the meeting in July 2002 when this ‘re-classification’ of payments was apparently discussed. It appears from the evidence that in fact there were a ‘series of discussions’ between Mr Hoey and family members (Giovanni, Thomas and perhaps Anna Martinazzo) and Eric Armstrong. (Transcript p129.)
22. The Witness Statement of Eric Armstrong (Exhibit A2) states as follows:

22.1 After discussions between the applicant, Tom Martinazzo and Bernard Hoey it was decided that ‘payments to family members should no longer be treated as wages and treated as loans’. Therefore he ‘separately identified these payments and recorded them differently from Wages’, and ‘Prepared journal entries that showed these payments as offsets against ‘Loan Martinazzo Family’ in the accounts I kept’ (paragraph 6).

22.2 At paragraph 7 he refers to a document at GMST pp.87-88, an analysis of the TG & A Martinazzo loan account in the business of MMH (the General Ledger account is at GMST pp.151-152). He says:

‘It shows the periodical payments (including payments to Giovanni) being adjusted against this account.
... the reference to these payments as “wages” was an error. I used this terminology because most of the payments at the time to Giovanni (and later to other family members including Laura Martinazzo and Anna Martinazzo) were made at the same time that I was preparing the wages payments for employees.’

22.3 At paragraph 8 he refers to the cash break up sheets (GMST pp89-115 and GMST 116-147) that ‘I prepared when paying periodic payments. I deliberately kept non-wage payments including the loan payment to family members distinct from ‘wages’ paid to employees’.

23. Under cross-examination Mr Armstrong stated that the applicant was the operations manager of the business and this did not change before and after the 2003 and 2004 years (Transcript p69).
24. He said that following a suggestion by Mr Hoey he was instructed to stop paying the Applicant as a salaried person and offset payments to him against a big loan owing to Tom and Anna. He identified that loan as a loan of $345,000 from the partnership to MMH, being the proceeds from the sale of a crane and frame. (Transcript pp.69-70.)
25. In response to questioning by the Tribunal about his statement that the applicant requested that superannuation payments be maintained at the same level (paragraph 9 of Exhibit A2), Mr Armstrong stated that while regular payments were also made for other family members, it was only in respect of the applicant that superannuation payments were made (Transcript p87).
26. Thomas Martinazzo’s Witness Statement (Exhibit A3) at paragraphs 24-29 addresses the relevant payments made to the applicant in the following way:

26.1 In July 2002 it was agreed between family members and the accountant Bernard Hoey that family members would be given loans/advances to cover living expenses and personal commitments. For Giovanni they ‘would be an amount roughly equal to wages ... [he was] receiving during 2002’, while for his daughter Laura and wife Anna they ‘were more in the nature of advance of profit from the business’ (paragraph 24). At paragraph 27 he states that ‘it was agreed that Giovanni would receive sufficient loans/advances so that he was no better or worse off than in a personal cash flow sense than if had been an employee’.

26.2 At paragraph 25 he refers to substantial amounts loaned to the business by him and Anna and says that ‘it seemed reasonable that some of this debt owed to us could be transferred to the benefit of [the applicant] and other family members’. He also says it was done to reduce State payroll tax and income tax.

27. In cross-examination Thomas Martinazzo agreed that the words used in his witness statement were in fact Mr Hoey’s words (Transcript p106 and 112) and that he had a basic understanding (Transcript p107) or no understanding (Transcript p112) of the relevant parts of the statement.
28. He testified that Mr Hoey had suggested the arrangement and he didn’t query it or have any objection to it (Transcript p111). He considered that the applicant was not being paid enough for the work he was doing (Transcript p112-113) and agreed that the applicant would not have to repay any of the money either to him (Transcript p109) or to anyone (Transcript p112).
29. The amounts paid to the applicant in the years in dispute by MMH and CRT were not included as assessable income in the applicant’s income tax returns for those years:

29.1 The return for the year ended 30 June 2003 was lodged on 17 December 2004 following a demand by the respondent. The only amount returned as assessable income was dividends of $46 (applicant T documents (‘GM’) p16).

29.2 The return for the year ended 30 June 2004 was lodged on 9 March 2006 following a demand by the respondent. The applicant returned as income $3,000 (Label 2 - allowances, benefits, earnings, tips, directors fees, etc), dividends of $19 and a trust distribution of $57,000 (GM p36).

30. Following an audit the respondent:

30.1 Increased the applicant’s assessable income by $46,540 in the year ended 30 June 2003 and issued a notice of assessment (GM p35).

30.2 Increased the applicant’s assessable income by $46,540 in the year ended 30 June 2004 and issued a notice of amended assessment (GM p57). (There was a further adjustment relating to a capital gain that was allowed on objection.)

31. Tax shortfall penalties of $2,763.65 (for the year ended 30 June 2003) and $5,779.60 (for the year ended 30 June 2004) were imposed in respect of the above adjustments in a notice of assessment and liability to pay penalty (GM p59). In each case this represented 25% of the tax shortfall on the basis that there had been a lack of reasonable care.
32. The applicant lodged objections against the 2003 year assessment, the 2004 year amended assessment and the penalty assessment (GM p63). The 2003 year objection was disallowed (GM p78). The 2004 year objection was partially allowed (in respect of the capital gain) (GM p80). The penalty objection was also partially allowed, the partial allowance relating to the penalty in respect of the capital gain (GM p82).

THE RELEVANT AUTHORITIES ON ORDINARY INCOME

33. Subsection 6-5 of the ITAA 97 provides as follows:

6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

34. It is necessary to consider numerous decisions of the courts to determine whether an amount is ‘ordinary income’.

Character in the hands of the recipient

35. In The Federal Coke Company Pty Ltd v FC of T [1977] FCA 3; 77 ATC 4255, Bowen CJ stated (at p 4264):

‘When one is considering the character of an amount received by a taxpayer, the enquiry must start with the question: what is the character of the receipt in the hands of the taxpayer?'’

(See also McLaurin v FC of T [1961] HCA 9; (1961) 104 CLR 381 at 391; and MIM Holdings Ltd v FC of T [1997] FCA 363; 97 ATC 4420 at 4429.)

Periodicity, recurrence and regularity

36. In FC of T v The Myer Emporium Ltd [1987] HCA 18; 87 ATC 4363 at 4370, the High Court said:

‘The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind.’

Expectation of payment

37. In FC of T v Dixon [1952] HCA 65; (1952) 86 CLR 540; 10 ATD 82 the High Court held that weekly amounts paid to a soldier by his former employer, to make up the difference between his former pay and that of his defence force pay, were ordinary income. Dixon CJ and Williams J held (at CLR p 557) that the amounts were:

‘... an expected periodical payment arising out of the circumstances which attended the war service undertaken by the taxpayer and because it formed part of the receipts upon which he depended for the regular expenditure of himself and his dependants and was paid to him for that purpose, it appears to us to have the character of income.’

38. Squatting Investment Co Ltd v FC of T [1953] HCA 13; (1953) 86 CLR 570 concerned a payment made voluntarily by the Commonwealth to a woolgrower, that was a payment additional to an original payment to which the woolgrower had been legally entitled. Fullagar J at [16] referred to the expectation that the additional payment would be made as being relevant to his decision that it was income.

Compensation or substitution principle

39. Fullagar J’s decision in Dixon relied on the payments being made in substitution for amounts that would have been income. He stated (at pp 567-568):

‘It seems to me that the appellant's receipts... must be regarded as having the character of income. They were regular periodical payments - a matter which has been regarded in the cases as having some importance in determining whether particular receipts possess the character of income or capital in the hands of the recipient... This consideration, while not unimportant, is not decisive. What is, to my mind, decisive is that the expressed object and the actual effect of the payments made was to make an addition to the earnings, the undoubted income of the respondent... What is paid is not salary or remuneration, and it is not paid in respect of or in relation to any employment of the recipient. But it is intended to be, and is in fact, a substitute for... the salary or wages which would have been earned and paid if the enlistment had not taken place. As such, it must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments. It acquires the character of that for which it is substituted and to which it is added.’

Reward for services

40. In Reuter v FC of T 93 ATC 5030 the Full Federal Court upheld a decision of Hill J at first instance [1993] FCA 18; (93 ATC 4037) that a fee paid to the taxpayer was income according to ordinary concepts. Hill J said at 4047:

‘Perhaps the most usual usage of the word "income" in ordinary speech is to describe that which comes in as a reward for services. Amounts such as salary, wages, commission, tips and the like, are universally regarded as income and it is immaterial whether they are paid under or pursuant to a contract of service or services on the one hand, or gratuitously on the other. So, too, for income tax purposes, it would be immaterial whether an amount which is a reward for services is paid to the taxpayer in advance of the services being performed (eg, a signing-on fee) or after the services have been performed, or whether the payment is made by the person for whom the services are performed or by some other person. It will also be generally immaterial whether the amount paid is paid periodically or in a lump sum. What will matter is the character of the payment as a reward for services or, as it was put by Fullager J in Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 at 57-8, whether the receipt is a "product" of the taxpayer's services.’

At page 4048 he held that:

‘... there was a sufficient relationship, not being a merely temporal relationship, between the payment and Mr Reuter's services to give the payment the character of income. The payment was so closely associated with the services which Mr Reuter performed for Mr Connell, or Rothwells, as the case may be, that it may be concluded, as a matter of fact, that that payment was a product of his services.’

41. In MIM Holdings Ltd v FC of T [1997] FCA 363; 97 ATC 4420 at 4429 the Full Federal Court set out the relevant principles for determining whether payment are of an income character, citing Hayes and Reuter as authority that:

‘Amounts paid in consideration of the performance of services will almost always be income.’

Voluntary payments

42. In Brown v Commissioner of Taxation [2002] FCA 318 at [39], Hill J noted that the cases refer to gifts which are not ordinary income as being ‘mere gifts’, because some gifts can be income notwithstanding that they are gratuitous and are derived without consideration. Commencing at [40] Hill J discusses the leading High Court decisions on this issue: Squatting Investment Co Ltd v Federal Commissioner of Taxation [1953] HCA 13; (1953) 86 CLR 570, Hayes v Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47 (and the related case of Christie v Federal Commissioner of Taxation [1956] HCA 20; (1956) 96 CLR 59 and Scott v Federal Commissioner of Taxation[1966] HCA 48; [1966] HCA 48; (1966) 117 CLR 514. He notes that:

‘Each makes the point, by reference to the particular facts before the Court that a benefit which is given voluntarily will be income if it is the "product "of an income producing activity.’

43. At [41] he cites Squatting Investment as authority for the proposition that ‘a voluntary payment made because of some personal quality which the taxpayer has will more likely to be a mere gift and not income’.
44. At [48] he cites Scott and Squatting Investment as referring to ‘the distinction between, on one hand, gifts made in relation to some activity or occupation of the donee of an income-producing character ... and, on the other hand, gifts referable to the attitude of the donor personally to the donee personally’.
45. In Brown, Hill J distinguished the cases involving a ‘mere gift’: the benefits received by Mr Brown were not provided because of friendship, and nor was it the case that he had already been appropriately rewarded for the services he had rendered [47].

TRIBUNALS’ FINDINGS

WHETHER THE PAYMENTS WERE LOANS TO THE APPLICANT

46. It is clear from the evidence that the amounts paid to the applicant by MMH were not loans made to him by MMH.
47. The applicant’s evidence is that his parents agreed that the amounts paid to him by MMH would be reduced or offset against their loan accounts.
48. There was in fact no evidence to support such a proposition.
49. There is no evidence that the parties intended that MMH would loan money to the applicant. Conversely the apparent intention was that MMH would repay amounts owing to the parents who agreed that these amounts would be paid directly to the Applicant by MMH.
50. Mr Armstrong was given instructions to that effect and the accounts of MMH are consistent with the intention of the parties, ie they do not show loans to the applicant but rather the repayments of amounts (referred to as ‘wages’) to the partnership.
51. The applicant’s submissions contend that the payments from MMH were payments from Thomas and Martinazzo that were in the nature of a loan (a ‘family payment’ from parents to son which could be repayable at the request of the parents) that would not in the normal course be repaid (unless it was necessary in the context of the business and family financial arrangements). Money that is given with no intention for it to be re-paid is in these circumstances either income or a gift.
52. The evidence clearly does not support the characterisation of the payments as loans and simply calling such payments a loan does not give them any particular status.
53. The intention to repay is a significant and arguably decisive factor in characterising a payment as a loan (see Case 3/96 [1995] AATA 394; 96 ATC 139 at 145, applying Black v FC of T 86 ATC 4113 and DFC of T v Black 90 ATC 4699). The applicant’s evidence that he did not think he had to repay the amounts paid to him is important in this regard as is the concession by Thomas Martinazzo that in his view the applicant would not have to repay the money to him or to anyone else.
54. The amounts paid to the applicant by CRT were clearly also not loans. Given the regularity of the payments combined with the making of superannuation payments and the work being performed, they were equally clearly not gifts.
55. In the accounts of CRT the amounts were described as ‘wages’ and were debited to the account called ‘Loan – Martinazzo Family’ which had a nil balance prior to the ‘wages’ first being debited on 14 January 2004. The evidence is that it was intended this loan to the Martinazzo family would be offset by amounts loaned by Thomas and Anna Martinazzo to CRT or alternatively by future trust distributions. There is no evidence in the accounts of CRT of any loans between the Applicant and CRT as at 30 June 2004. Like the payments from MMH, there is no evidence that the applicant would ever have to repay any of the amounts he was paid by CRT.

ORDINARY INCOME - APPLICATION OF THE LAW

56. The Tribunal is of the opinion that all the amounts paid to the applicant by MMH and CRT have all the indicia of ordinary income.
57. They were regular weekly payments of $895 paid during the years in dispute and therefore have the periodicity, regularity and recurrence that is considered to be a hallmark of ordinary income (Myer).
58. The evidence of both the applicant and Thomas Martinazzo is that the amounts were paid to cover living expenses. Therefore they ‘formed part of the receipts upon which he depended for the regular expenditure of himself and his dependants and was paid to him for that purpose’ (Dixon CJ and Williams J in Dixon).
59. Dixon refers to ‘an expected periodical payment’. It can be inferred from the Applicant’s evidence that there was a clear expectation on his part that he would continue to receive these payments if he continued to perform similar work for the relevant operating entity.
60. The amounts also satisfy the substitution principle relied upon by Fullagar J in Dixon. They were regular payments of $895 and equal to the net amounts paid to him by MMH immediately prior to the years in dispute. The applicant’s evidence is that they were a ‘substitute for wages’.
61. The payments were so closely associated with the services which the applicant performed for MMH and CRT that the Tribunal concludes, as a matter of fact, that that they were a product of his services (Hill J in Reuter):

61.1 The applicant had previously been employed in the crane hire business carried on by CPH and MMH. During the years in dispute he continued to do the same work for MMH, and then CRT, and was paid the same amount as a substitute for wages. The applicant agreed under cross-examination that he was getting paid because he was going to work. There is no evidence of other payments being made to him by MMH or CRT in consideration of the work that he did (see Hill J in Brown).

61.2 In addition to being paid the same amount as a substitute for wages, he asked Mr Armstrong that MMH continue to make superannuation contributions at a similar rate to that which he would have received if he had still been receiving a salary.

61.3 Under cross-examination the applicant suggested that the payments were made to him as a director (he was a director of MMH during the period 19 June 1992 to 13 November 2003 – SCD p287). Directors’ fees are clearly a reward for services and assessable as ordinary income.

61.4 If the payments from MMH are characterised as payments from the partnership to the applicant as a reward for the services rendered to MMH (the shares in which were owned by the partners Thomas and Anna Martinazzo) this does not affect assessability. It is immaterial whether the payment is made by the person for whom the services are performed or by some other person (Reuter).

61.5 It is irrelevant that a fair wage for the work he did may have been higher than the amounts paid (see evidence of Thomas Martinazzo). In any event the amounts in dispute were equal to the amounts previously paid to him as salary and wages to perform the same work.

62. The applicant contends that the payments from MMH were a gift from his parents, of an entirely ‘personal nature’ and provided for his services to the ‘family cause’. Therefore they were a product of the family cause and not his services to MMH. In the Tribunal’s view the cases where a voluntary payment has been held to be a mere gift are clearly distinguishable from the facts in this case. This is clearly not a case of a single payment made for some personal quality of the recipient who has already been rewarded for his services. On the contrary:

62.1 They were regular weekly payments that would continue only while the applicant worked for the relevant operating entity (MMH or CRT), and therefore made in relation to services rendered rather than some personal quality.

62.2 The applicant was not otherwise rewarded for his services.

62.3 There was an expectation that he would be paid.

62.4 The payments were clearly a substitute for wages. Moreover, superannuation continued to be paid at the same rate.

ADMINISTRATIVE PENALTY

63. Division 284 of Schedule 1 to the TAA deals with administrative penalties for statements, unarguable positions and schemes. It applies from 1 July 2000, and in respect of income tax matters for the 2000-01 and later income years.
64. Relevantly in this matter, Division 284 imposes penalties where an entity makes a statement which is false or misleading in a material particular (subsection 284-75(1)) or takes a position under an income tax law that is not reasonably arguable (subsection 284-75(2)).
    

False or misleading statement

65. Subsection 284-75(1) applies where an entity or its agent makes a statement to the Commissioner, the statement is false or misleading in a material particular whether because of things in it or omitted from it, and there is a shortfall amount as a result of the statement. In this case the Tribunal finds that the applicant or his agent made a false or misleading statement in the returns for the years ended 30 June 2003 and 2004 by omitting from assessable income the payments made to the applicant by MMH and CRT. As a result there was a shortfall amount pursuant to item 1 of the table in subsection 284-80(1).
66. The amount of the penalty is determined pursuant to section 284-85. The base penalty amount is worked out using the table in subsection 284-90(1). Where the shortfall amount results from a ‘failure by you or your agent to take reasonable care to comply with a taxation law’, the base penalty under item 3 of the table is 25% of the shortfall amount. The penalties imposed on the applicant were worked out under item 3 to be $2,763.65 and $5,779.60 in the years ended 30 June 2003 and 2004 respectively (GM p59).
67. The respondent’s view on the meaning of reasonable care in item 3 is set out in Miscellaneous Tax Ruling MT2008/1. The Tribunal agrees with that view. Taking 'reasonable care' in the context of making a statement to the Commissioner means giving appropriately serious attention to complying with the obligations imposed under a taxation law. It requires an entity to take the same care in fulfilling their tax obligations that could be expected of a reasonable ordinary person in their shoes. The standard of care is measured objectively (the actual intentions of the entity are not relevant), but takes into account subjective factors such as the entity’s knowledge, education, experience and skill.
68. A professional person with specialist tax knowledge will be subject to a higher standard of care that reflects the level of knowledge and experience a reasonable person in their circumstances will possess (see Arnett & Ors v. FC of T 98 ATC 2137; (1998) 39 ATR 1095 and Case 1/2002 [2002] AATA 291; 2002 ATC 101; (2002) 49 ATR 1189). The appropriate benchmark is the level of care that would be expected of an ordinary and competent practitioner practising in that field and having the same level of expertise.
69. In this case both the applicant and his agent, Mr Hoey, were involved in the discussions that took place in July 2002 and where it was agreed that the Applicant would be paid amounts equal to, and in substitution for, the amounts that he previously received as wages. The amounts were not to be loaned to him but rather offset against his parents loan accounts or possible future trust distributions. In these circumstances, the failure of the applicant to include those amounts in assessable income was clearly a failure to give appropriately serious attention to complying with his obligations under the tax law, even taking into consideration the fact that he had no specialist tax knowledge. The position of the applicant’s tax agent, Mr Hoey, is even more clear: his specialised tax knowledge required a higher standard of care and recognition that the amounts were likely to be assessable as ordinary income.

Taking a position under an income tax law that is not reasonably arguable

70. Subsection 284-75(2) imposes a penalty where a shortfall amount arises as a result of a statement, made by an entity or its agent, which treated an income tax law as applying to a matter in a particular way that is not reasonably arguable, and the shortfall amount exceeds the relevant threshold set out in item 4, 5 or 6 of the table in subsection 284-90(1)
71. The amount of the penalty is determined pursuant to section 284-85. The base penalty amount is worked out using the table in subsection 284-90(1). Where the shortfall amount results from ‘you or your agent treating an income tax law as applying to a matter or identical matters in a particular way that is not reasonably arguable, and that amount is more than the greater of $10,000 or 1% of the income tax payable by you for the income year, worked out on the basis of your income tax return’, the base penalty under item 4 of the table is 25% of the shortfall amount.
72. The respondent’s view on the meaning of ‘reasonably arguable’ is set out in Miscellaneous Tax Ruling MT2008/2. The Tribunal agrees with that view. Essentially, the test is whether, having regard to the relevant authorities, it would be concluded that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect. The reasonably arguable position standard is an objective standard involving an analysis of the law and application of the law to the relevant facts (see Hill J in relation to the former subsection 226C(1) of the ITAA 36 in Walstern v. Commissioner of Taxation [2003] FCA 1428; 2003 ATC 5076; (2003) 54 ATR 423, approved by the Full Federal Court in Pridecraft Pty Ltd v. Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; (2004) 58 ATR 210).
73. By comparison with the reasonable care test which takes into account subjective factors, there is no subjective aspect to the reasonably arguable position test. Having a reasonably arguable position is a further requirement that must be satisfied where the shortfall amount is above the amount specified in the relevant item in subsection 284-90(1).
74. In this case, the applicant argues that the amounts paid to him are not ordinary income. The respondent contends, correctly in the Tribunal’s view, that this argument is not either ‘about as likely to be correct as incorrect’, or ‘more likely to be correct than incorrect’. On the contrary, as found by the Tribunal, all the relevant indicia of ordinary income point to the amounts being assessable pursuant to section 6-5 of the ITAA 97.
75. The shortfall amount in each of the years ended 30 June 2003 and 2004 is more than the greater of $10,000 or 1% of the income tax payable worked out on the basis of the relevant return. In both years 1% of the income tax payable on the basis of the return is less than $10,000: in 2003 no tax was payable (see T3 and T4); and in 2004 the tax payable was $14,683 and 1% was therefore $1,468.
76. The Tribunal finds that the applicant is liable to the administrative penalty imposed in the relevant notice of assessment and liability to pay penalty, either pursuant to subsection 284-75(1) or alternatively pursuant to subsection 284-75(2).
    

Remission pursuant to subsection 298-20(1) of the TAA

77. Subsection 298-20(1) of the TAA provides that ‘the Commissioner (and therefore the Tribunal) may remit all or a part of the penalty’.
78. The TAA imposes the penalty and the discretion to remit is conferred by subsection 298-20(1) (see Commissioner of Taxation v Archibold Dixon [2007] FCA 1079).
79. The Tribunal is of the view there is no basis for the full or partial remission of the penalties. On the contrary, the following factors point to remission being inappropriate:

79.1 The amounts here were large in comparison with the other assessable income in the relevant year of income.

79.2 The applicant has a poor compliance record. The income tax returns for both the 2003 and 2004 year were lodged late following final notices issued by the respondent (GMSD2 pp.237-238 and 240-241). A final notice also had be issued for the return for the year ended 30 June 2006 (GMSD2 pp.243-244).

DECISION

80 The Tribunal affirms the decisions under review.

I certify that the 80 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member

Signed: June Rainey.

Associate

Date/s of Hearing 1 & 2 December 2008

Date of Final Submissions 19 December 2008

Date of Decision 30 January 2009

Counsel for the Applicant Mr P Bevilacqua

Solicitor for the Applicant Butcher Paull and Calder

Counsel for the Respondent Ms L Black

Solicitor for the Respondent Mr M Vincent

Australian Taxation Office