Intevox Pty Ltd and Commissioner of Taxation [2010] AATA 57 (28 January 2010)

Last Updated: 29 January 2010

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 57

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2009/3316

TAXATION APPEALS DIVISION		)
	Re		INTEVOX PTY LTD

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Mr Frank O'Loughlin, Senior Member

Date 28 January 2010

Place Melbourne

Decision

The Tribunal affirms the decision under review.

(sgd) Frank O’Loughlin
Senior Member

TAXATION – goods and services tax - penalty - whether agent took reasonable care - whether remission of penalty is warranted.
A New Tax System (Tax Administration) Bill (No. 2) 2000
Income Tax Assessment Act 1936 (Cth) s 251M
Taxation Administration Act 1953 (Cth) Schedule 1, ss 284-70 and 298-20
Tax Agent Services Act 2009 (Cth)
Tax Agent Services Bill 2008
Tax Agent Services (Transitional Provisions and Consequential Amendments) Act 2009 (Cth)
Tax Agent Services (Transitional Provisions and Consequential Amendments) Bill 2009

Hart v Commissioner of Taxation (2003) 131 FCR 203

MLC Limited v Commissioner of Taxation [2002] FCA 1491; (2002) 126 FCR 37
North Ryde RSL Community Club Limited v Commissioner of Taxation (2002) 121 FCR 1
Dixon v Federal Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287

Re Hobart Central Child Care Pty Ltd and Commissioner of Taxation [2005] AATA 1027

REASONS FOR DECISION

28 January 2010

Mr Frank O'Loughlin, Senior Member

ISSUES IN DISPUTE

1. In this matter the Applicant taxpayer seeks review of the Respondent Commissioner’s decision to deny a further reduction of a 5 per cent tax shortfall penalty imposed for incorrectly claiming input tax credits (ITCs) of $183,362 in respect of six contracts it had entered to purchase six, at the time unbuilt, residential properties ‘off the plan’.
2. The Applicant incorrectly claimed the above mentioned ITCs where:
   • (a) the purchase contracts were expressed to be margin scheme purchases;
   • (b) the Applicant did not have a tax invoice at the time of claiming the ITCs;
   • (c) any on-sale of the properties by the Applicant would not have been taxable supplies. Rather, such sales would have been input taxed supplies of residential properties that had previously been sold as residential premises (upon their sale to the Applicant);
   • (d) only a minor deposit had been paid pursuant to the purchase contracts which had not settled;
   • (e) (the Applicant claims) its registered tax agent (Agent) which assisted with its Goods and Services Tax (GST) obligations sought and obtained telephone advice from an officer of the Australian Taxation Office (ATO) to the effect that GST could be accounted for on an accruals basis; and
   • (f) for the quarter in which the ITCs were claimed the Applicant had not made any taxable supplies and claimed only the ITCs said to be available in respect of the margin scheme property purchases such that a refund of $183,362 would have been paid had the ATO processed the claim.
3. The 5 per cent tax shortfall penalty that has been imposed is the penalty remaining following an 80 per cent remission of a 25 per cent shortfall penalty pursuant to s 284-70 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the Administration Act) for failure to take reasonable care. The Commissioner allowed the 80 per cent remission because the Applicant’s Agent disclosed the shortfall when advised that the Applicant’s affairs were to be audited.

APPLICANT’S CONTENTIONS

4. The Applicant seeks to set aside the Commissioner’s refusal to reduce the penalty further on the grounds that:
   • (a) Mr Phillip Freeman, the Applicant’s director, relied in good faith on the advice of the Applicant’s Agent. Although Mr Freeman is a certified practicing accountant, he claims not to be skilled in GST and not able to make a decision on the claim without advice; and
   • (b) the Applicant’s Agent had inadvertently made an error in its due diligence.
5. The Applicant does not dispute:
   • (a) that an incorrect statement was made; or
   • (b) that there was a tax shortfall amount,

but does dispute that the reasonable care standard was not met. The Applicant maintains that Mr Freeman took reasonable care in obtaining and acting on advice and by providing the relevant contracts and invoices to the Applicant’s Agent and that, as noted above, the Agent had inadvertently made an error in its due diligence.

6. In the alternative, the Applicant seeks further remission of penalty. The Applicant claims that the Tax Agent Services (Transitional Provisions and Consequential Amendments) Act 2009 (Cth) (Amendment Act) and the Tax Agent Services Act 2009 (Cth) (Services Act) ought be seen as legislative recognition that penalizing taxpayers who have not done any wrong for the mistakes of their registered tax agents is inappropriate and failing to remit penalties in these circumstances can now be seen as harsh.

COMMISSIONER’S CONTENTIONS

7. The Commissioner asserts that there was a failure to take reasonable care for four reasons:
   • (a) the sale was under the margin scheme and it is not controversial that ITCs are not allowable for such sales;
   • (b) the Applicant did not hold a valid tax invoice at the time of claiming the ITCs and the requirement to hold such an invoice before claiming an ITC is, again, not controversial;
   • (c) ITCs would not have been available to the Applicant because any on-sale or lease of the properties would have been input taxed supplies of residential premises that had previously been sold as residential premises. This reason was advanced by the Respondent for the first time during the hearing of the matter; and
   • (d) if ITCs were possibly available at all, the appropriate time that they would be available is when the purchase contracts settled and the Commissioner’s views in relation to this matter (GSTR 2000/28) are well known.
8. The Commissioner also asserts that further remission of the penalty pursuant to s 298-20 of Schedule 1 of the Administration Act should not be given because:
   • (a) this was not an isolated record keeping mistake. Rather it was a large, extraordinary transaction and should have been examined with more care than smaller, more frequent transactions; and
   • (b) there was sufficient business experience to have an understanding of reporting requirements and that it was reasonable to expect sufficient accounting systems to prevent such errors occurring.
9. Further, the Commissioner asserts that it is inappropriate to anticipate the changes to the system of penalties that will provide safe harbours for taxpayers who take reasonable care in instructing their registered tax agents which will begin to operate from 1 March 2010.

FACTS

10. The Applicant was registered as a proprietary company on 10 December 2008. Shortly thereafter the Applicant registered for GST and adopted the non-cash basis of determining GST liability, lodging quarterly returns.
11. During the tax period that ended on 31 December 2008 the Applicant entered contracts to purchase six residential strata titled apartments ‘off the plan’ for a purchase price of $2,016,982 with an expected settlement date of 30 October 2009. These were the Applicant’s first transactions in a residential building construction industry business upon which the Applicant had embarked.
12. For each contract the Applicant paid only a $1000 ‘pre-deposit’ and was not required to pay the balance of the deposit until 30 March 2009.
13. The ‘GST margin scheme’ panel of the Particulars of Sale of each of the contracts indicated that the purchases were ‘MARGIN SCHEME LAND COMPONENT ONLY’ purchases.
14. The Applicant received invoices dated 28 December 2008 from the vendor of the properties. These invoices detailed the vendor’s Australian Company Number but not an Australian Business Number.
15. The Applicant claims that its Agent had made an enquiry of the ATO concerning the basis on which GST was to be brought to account and that the advice was that an accruals or non cash basis could be used. There isn’t any independent evidence of this enquiry. It is not clear that this enquiry specifically addressed the Applicant’s position or the topics of unsettled property purchase contracts and/or margin scheme property purchases.
16. Mr Freeman, an accountant, had been in the United States of America off and on for approximately 10 years and had little knowledge of the GST system. As a consequence, Mr Freeman sought and found what he believed to be an appropriate firm of registered tax agents and advisers who could assist him and engaged the Agent. Mr Freeman consulted the Agent in relation to the Applicant’s GST obligations and entitlements and believed everything that was done was in accordance with the law. For the purposes of those consultations, Mr Freeman provided the Agent with copies of the purchase contracts and the invoices.
17. On 3 February 2009 the Applicant filed its Business Activity Statement (BAS) for the quarter ended 31 December 2008. The BAS was prepared by the Applicant’s Agent and claimed ITCs of $183,362 in relation to the above property purchases.
18. On 12 February 2009 an officer of the ATO contacted the Applicant’s Agent and advised of an audit.
19. On 16 February 2009 the Applicant’s Agent advised the ATO that a revision of the BAS was required.
20. On 18 February 2009 a copy of one of the purchase contracts was provided by the Applicant’s Agent to the ATO auditor.
21. The auditor determined that the Applicant was not entitled to the ITCs for three reasons:
    • (a) the sale was under the margin scheme;
    • (b) the Applicant did not hold a tax invoice; and
    • (c) that GSTR 2000/28 provides that an ITC on a purchase of land is attributed to, and claimable in respect of, the period in which settlement occurs.
22. On 20 March 2009 a notice of assessment of GST net amount issued and a tax shortfall penalty of 25 per cent was imposed on the basis that either the Applicant or its Agent had failed to take reasonable care. That penalty was remitted by 80 per cent because the Applicant’s Agent made a voluntary disclosure after notification of the audit, which was considered to save the Commissioner significant time and resources in the audit. The base penalty amount was reduced from $45,840 to $9,168.
23. The ATO did not allow further penalty remission under s 298-20 of Schedule 1 of the Administration Act. In the ATO’s view:
    • (a) the transaction was extraordinary. This was not an isolated record keeping mistake, it was a large, extraordinary transaction and should have been examined with more care than smaller more frequent transactions;
    • (b) it was reasonable to expect sufficient accounting systems would be in place to prevent reporting errors from occurring;
    • (c) a registered tax agent was used to prepare and lodge the statement who is expected to have a higher level of understanding of reporting requirements and is expected to take a greater level of care in complying; and
    • (d) the Applicant’s director had significant experience in business to have an understanding of reporting requirements.
24. The Applicant could not complete the purchase contracts for the six properties as a consequence of not being entitled to the ITCs it had claimed and not having sufficient cash flow.
25. Mr Freeman indicated that he did not have significant resources but did not provide any further details and or give any details of the Applicant’s resources.

PENALTY

26. The system of penalties set out in Division 284 of Schedule 1 to the Administration Act does not impose penalty simply because there has been a tax shortfall - something more is required.[1]
27. In the present context, it is necessary for those responsible for the statement that led to the shortfall to have failed to have taken reasonable care.

REASONABLE CARE

28. The concept of reasonable care embraces a level of care that is less than perfect care. Whether or not reasonable care has been taken depends on the circumstances of the case.[2] To show that reasonable care has been taken does not necessarily require an advance ruling from the Commissioner[3] nor does it require taxpayers to take every step that could possibly be taken to determine the appropriate disclosures to the ATO.
29. At times, a taxpayer can be said to have taken reasonable care when a position is taken based on professional advice.
30. In MLC Limited Hill J said of the reasonable care test:

[52] It is not appropriate in this case to endeavor to set out what would constitute reasonable care in all circumstances. For much will depend upon the facts of a particular case. Some assistance may be obtained, however, from the decision of the Full Court of this Court in North Ryde RSL Community Club Ltd v Commissioner of Taxation (Cth) (2002) 121 FCR 1; ATC 4293. In that case the Commissioner claimed that the appellant had not exercised reasonable care in lodging a return omitting a percentage of subscriptions allocated to Clubkeno Holdings on the basis that the amounts were not assessable because they were mutual receipts and not the proceeds of trading and in circumstances where the club knew that the Commissioner took a contrary view. Notwithstanding that the Court agreed with the Commissioner that the amounts in question were assessable income it was held by Spender, Finn and Merkel JJ that it had not been shown that the Club had not exercised reasonable care. The Administrative Appeals Tribunal, which had affirmed the penalty did so both because there had been a failure to disclose an opinion on the matter which the club had sought, and the failure to do so entitled the Tribunal to infer that the opinion would not assist the club’s case and because it was said to be imprudent not to have sought a ruling where the circumstances were that the club was aware there was a real conflict of views. It was held, however, on the appeal that there was no basis for a finding that the club had failed to exercise reasonable care. In particular failure to seek a binding private ruling from the Commissioner was not in the circumstances failure to exercise reasonable care.
[53] In my view the present is also a case where on the facts it cannot be said that there was a failure to exercise reasonable case [sic]. ... Here, the taxpayer through its accountants had made an enquiry and been told that the view it took, a view taken in good faith and highly arguable, was correct. The view was one held generally in the insurance industry. It is true that it could have sought a binding ruling from the Commissioner, but clearly failure to seek a ruling will not in every case be equated with failure to exercise reasonable care. ... A taxpayer who relies upon expert advice as here where the advice is held generally in the industry and does not conflict with any statement made by the Commissioner and indeed is confirmed by enquiry of the ATO is not required to obtain a ruling to guard against an allegation that the taxpayer has not exercised due care.

and in North Ryde RSL Community Club Limited v Commissioner of Taxation[4] Spender, Finn and Merkel JJ said:

[84] In all the circumstances we can see no basis for a finding that the appellant failed to take reasonable care to comply with its obligations under the ITA Act or the regulations. ... We see no basis, on the facts found by the Tribunal, for its conclusion that the failure to apply for a private ruling constituted a “failure to take reasonable care” to comply with the ITA Act or regulations.

31. The Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (No 2) 2000 that led to enactment of Division 284 indicated that:

1.67 The reasonable care test requires a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer to fulfil the taxpayer’s tax obligations. ... Whether a taxpayer has behaved reasonably will depend on all the facts of each case.
1.68 The test looks to whether a person, in all the circumstances of the taxpayer, would have foreseen as a reasonable probability or likelihood the prospect that the act or failure to act would result in a shortfall amount. It is not a question of whether the taxpayer actually foresaw the probable impact of the act or failure to act, but whether a person in the same circumstances of the taxpayer would have foreseen it. The test does not depend on the actual intentions of the taxpayer.
1.69 Reasonable care requires a taxpayer to make a reasonable attempt to comply with the provisions of a taxation law. The effort required is one commensurate with all the taxpayer’s circumstances, including the taxpayer’s knowledge, education, experience and skill.
1.70 The reasonable care test is not intended to be overly onerous for taxpayers. ...
1.71 ... Whether penalty is attracted will depend on the circumstances of the case.
...
1.73 On questions of interpretation, reasonable care requires a taxpayer to come to conclusions that would be reasonable for an ordinary person to come to in the circumstances of the taxpayer. ...
1.74 The taking of a position with respect to a tax matter that is frivolous, or which lacks a reasonable basis, would be a strong indication of a lack of reasonable care.
...
1.76 If a taxpayer seeks to rely upon the wrong advice, and the taxpayer’s skill and education was such that the taxpayer could reasonably be expected to have known or suspected that the advice was wrong, the taxpayer would risk penalty. A taxpayer would also risk penalty if the taxpayer was careless in presenting all of the relevant facts to the adviser and this had materially affected the advice on which the taxpayer sought to rely.
1.77 Where a taxpayer uses a registered tax agent or other person to help prepare and lodge a BAS or tax return, the taxpayer will be vicariously liable for any penalties caused by the agent providing information that results in a shortfall amount. This includes the tax agent not taking reasonable care. The standard expected of a tax agent will be much higher than the standard expected of the client.

32. In circumstances where:
    • (a) the Applicant’s first business transaction, involving a cash outlay of only $6,000, led to an ITCs claim of $183,362 which would have produced a refund of that amount;
    • (b) there wasn’t any basis upon which the Applicant was entitled to those ITCs;
    • (c) there wasn’t any widely held view to the contrary; and
    • (d) a minimal amount of enquiry as to the effect of sales of land under the margin scheme would have disclosed that the Applicant did not have any entitlement to any ITCs,[5]

those responsible for making the claim for the ITCs in question met the statutory requirement of having failed to take reasonable care upon which the Commissioner’s decision that penalty is payable is based. The claim for the ITCs in question was not one that passed through a voluminous body of entries in an accounting system and escaped detection. It was the only claim made in an otherwise blank BAS. Those circumstances ought to have attracted, or led to, some form of enquiry as to whether the claim was correct. That enquiry would have led to the conclusion that there wasn’t any entitlement to the ITCs claimed.

33. While similar observations could be made about the non availability of ITCs both because of the lack of a valid tax invoice and because any on-sale of the properties would have been input taxed supplies of residential premises, it is not necessary to go to these aspects of the Commissioner’s case. Nor is it necessary to go to the appropriate time for recognition of the purchases of the land for GST purposes. Failing to observe the requirements of the law concerning margin schemes is sufficient to demonstrate that reasonable care was not taken in making the statements that were made in the Applicant’s December 2008 quarter BAS.
34. In the present circumstances, it is difficult to conceive of any additional mistakes that could have been made in asserting that the ITCs claimed were properly available. There isn’t any basis on which the Applicant can claim that reasonable care was taken. If there was a scale of cases in which it could be said that reasonable care has not been taken, the present circumstances would not be at the innocent end of that scale.

REMISSION OF PENALTY

35. A penalty imposed under s 284-75 of Schedule 1 of the Administration Act may be remitted under s 298-20 of Schedule 1 of that Act.
36. For there to be a remission it is necessary to show that the penalty is harsh in the particular circumstances of the taxpayer.[6] There needs to be mitigating circumstances that could be regarded as mitigating the taxpayer’s behavior while at the same time recognising the purpose and role that penalties play in a system of self assessment of tax liability.[7]
37. The fact that the Commissioner detects a false statement before a taxpayer enjoys a reduced tax burden, or a tax refund, that would otherwise arise in the absence of detection is not a relevant consideration in exercising a discretion to remit a penalty.[8]
38. The statutory framework clearly contemplates that penalties are to be imposed when incorrect statements are made through a lack of reasonable care. Further, the liability to penalty is vicarious. The level of penalty contemplated by the legislation is 5 per cent of the tax shortfall in circumstances of voluntary disclosures where there has been a lack of reasonable care. Against that back drop, the current level of remission to 5 per cent is not considered to be harsh.
39. In 2009, the Commonwealth Parliament enacted laws to reform the regulation of Tax Agent Services - the Amendment and Services Acts.
40. Part of that package of reforms will relieve taxpayers of vicarious penalties if they take reasonable care in instructing registered tax agents and those agents fail to take reasonable care in preparing statements lodged with the Commissioner. More specifically, the new law will ensure:[9]

... that taxpayers who engage a registered tax agent or BAS agent and provide them with all relevant information:

• are no longer subject to a penalty for making a false or misleading statement that results in a shortfall amount if the shortfall amount was caused by their agent’s failure to take reasonable care; and

....

41. Other parts of this package of reforms:
    • (a) remove taxpayers’ statutory right to sue registered tax agents to recover penalties levied as a consequence of negligently prepared taxation statements. Currently s 251M of the Income Tax Assessment Act 1936 (Cth) gives taxpayers a right to sue their registered tax agents and recover amounts of fines or other penalties imposed as a consequence of the negligence of those agents. This right is said to be unaffected by common law concepts of contributory negligence.[10] Section 251M is to be repealed;
    • (b) create a code of conduct for registered tax agents; and
    • (c) allow sanctions to be imposed on registered tax agents who fail to take appropriate care.
42. The new regime will apply from 1 March 2010.
43. While it is not appropriate for the Tribunal to anticipate the change in penalty regime that will apply from 1 March 2010, it is necessary to consider whether a 5 per cent level of penalty is harsh against a back drop of the very recent parliamentary recognition of the need to change the vicarious system of penalties for those taxpayers who have taken reasonable care in instructing agents to prepare their taxation statements. The relevant question being, should it now be recognised as harsh not to remit a penalty for taxpayers who have taken reasonable care in instructing their agents but whose agents let them down by not taking reasonable care in preparing their taxation statements?
44. The circumstances of the Applicant are such that:
    • (a) the relevant shortcomings were not at the innocent end of the scale of cases in which it could be said that reasonable care has not been taken and occurred during a period when the law provided for vicarious liability for shortcomings of agents that amount to failures to take reasonable care (and more serious failures);
    • (b) it is not clear whether the 5 per cent penalty imposed will be financially ruinous; and
    • (c) the penalty has been imposed under a regime which provides significant assistance in recovering penalties from registered tax agents where any degree of negligence by the agent can be shown.
45. In these circumstances, the 5 per cent penalty imposed is neither unfair nor harsh.

DECISION

46. In the present circumstances there was a failure to take reasonable care, penalty is payable pursuant to s 284-75 of Schedule 1 of the Administration Act and no further remission of the penalty under s 298-20 of Schedule 1 of that Act is warranted.
47. The Tribunal affirms the decision under review.

I certify that the forty seven (47) preceding paragraphs are a true copy of the reasons for the decision herein of

Mr Frank O’Loughlin, Senior Member

(sgd): Leah Berardi

Clerk

Date of Hearing 15 December 2009

Date of Decision 28 January 2010

Advocate for the Applicant Mr Phillip Freeman

Advocate for the Respondent Ms Vanessa Bruton, ATO Legal Services

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[1] See Hart v Commissioner of Taxation (2003) 131 FCR 203 per Hill and Hely JJ at [44].

[2] MLC Limited v Commissioner of Taxation [2002] FCA 1491; (2002) 126 FCR 37 per Hill J at [52]

[3] MLC Limited at [53]

[4] (2002) 121 FCR 1

[5] For example, under the heading “[63 365] Margin Scheme” in Deutch, Friezer, Fullerton, Hanley and Snape ‘Australian Tax Handbook’ Thompson 2008 it is only necessary to read 13 lines to learn that ITCs are not available to a purchaser of land under a margin scheme sale.

[6] See Dixon v Federal Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287 at [26] per Spender, Ryan and Emmett JJ.

[7] See Re Hobart Central Child Care Pty Ltd and Commissioner of Taxation [2005] AATA 1027 at [205] per DP Forgie.

[8] See Dixon at [21].

[9] Tax Agent Services (Transitional Provisions and Consequential Amendments) Bill 2009, Explanatory Memorandum [2.17]

[10] Tax Agent Services Bill 2008, Explanatory Memorandum [3.9] to [3.15]