Hunt and Commissioner of Taxation [2011] AATA 69 (9 February 2011)

Last Updated: 9 February 2011

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 69

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2010/2220-2221

TAXATION APPEALS DIVISION		)
	Re		PIERS ROGER HUNT

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Senior Member R W Dunne

Date 9 February 2011

Place Adelaide

Decision

The Tribunal affirms the objection decision under review.

..............................................
R W DUNNE
(Senior Member)

CATCHWORDS

INCOME TAX – administrative penalties – taxation returns of applicant prepared by tax agent – taxpayer relying on advice provided by tax agent – failure on the part of taxpayer and tax agent to take reasonable care – remission of penalties – objection decision under review affirmed.

Taxation Administration Act 1953 (Cth), Schedule 1, ss 284-75(1), 284-90(1), 284-225(2), (3) and (5), 298-20(1) and (2)
Re Peco Necovski and Commissioner of Taxation [2009] AATA 195
BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164

REASONS FOR DECISION

9 February 2011

Senior Member R W Dunne

INTRODUCTION

1. In or around March 2005, the applicant (Piers Roger Hunt) was recruited by and accepted a position with the SA Police (“SAPOL”) and migrated to Australia from the United Kingdom (“UK”) to take up the position. He lodged a taxation return and an amended taxation return with the respondent in which claims for deduction for relocation expenses from the UK were made. A notice of taxation audit was sent to Mr Hunt by the respondent in which he was advised that his claims for relocation expenses would be reviewed. His tax agent requested amendments to remove the claims for relocation expenses in the relevant returns. As a result of the tax audit, the claims for deduction for relocation expenses were disallowed and an administrative penalty of 50 percent, imposed under the Taxation Administration Act 1953 (“TA Act”), was applied to the tax shortfall that arose. The respondent reduced the penalty to 10 percent. The applicant objected against the administrative penalty assessments and the respondent decided to disallow the objection in full. The applicant has applied to this Tribunal for review of the objection decision.
2. At the hearing, Mr Hunt represented himself and gave evidence, and the respondent was represented by Mr T Duggan. The T documents (Exhibit R1) and the supplementary T documents (Exhibit R2) lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) were admitted in evidence, together with the following exhibits:
   • email correspondence dated 15 and 16 July 2009 between the applicant and Mr R Collins (employee of applicant’s tax agent) (Exhibit R3);
   • letter dated 28 August 2009 from Cobiac & Chapman, tax agent, addressed to “Valued Client” (Exhibit R4);
   • applicant’s work-related expenses schedule for 2008 (Exhibit R5);
   • applicant’s work-related expenses schedule for 2009 (Exhibit R6); and
   • newspaper article from Adelaide “Sunday Mail” newspaper dated 20 September 2009 titled “UK recruits cop dodgy tax advice” (Exhibit R7).

ISSUES BEFORE THE TRIBUNAL

3. The issues before the Tribunal are as follows.
   • (a) Is the applicant liable for an administrative penalty under the TA Act?
   • (b) If so, did the shortfall amount result from recklessness by the applicant and/or his tax agent as to the operation of a taxation law?
   • (c) Should the respondent exercise its discretion under the TA Act to remit the administrative penalty in whole or in part?

LEGISLATION

4. Under Schedule 1, Division 284 of the TA Act a penalty may apply if a taxpayer (or tax agent) makes a statement to the respondent about a taxation law that results in a “shortfall amount” of tax to the taxpayer. The relevant provisions read:

“284-75 Liability to penalty
             (1)  You are liable to an administrative penalty if:
                     (a)  you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law; and
                     (b)  the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
                     (c)  you have a *shortfall amount as a result of the statement.
Note: Subsection 2(2) specifies laws that are not taxation laws for the purposes of this Subdivision.
             ...
284-90  Base penalty amount
          (1)  The base penalty amount under this Subdivision is worked out using this table:

Base penalty amount
Item	In this situation:	The base penalty amount is:
2	Your *shortfall amount or part of it resulted from recklessness by you or your agent as to the operation of a *taxation law	50% of your *shortfall amount or part

...

284-225  Reduction of base penalty amount
            ...
       (2)  The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced under subsection (3) or (4) if you voluntarily tell the Commissioner, in the *approved form, about the shortfall amount or the part of it before the earlier of:
                     (a)  the day the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; or
                     (b)  if the Commissioner makes a public statement requesting entities to make a voluntary disclosure by a particular day about a *scheme or transaction that applies to your financial affairs—that day.
         (3)  The *base penalty amount for your *shortfall amount, or for part of it, is:
                     (a)  reduced by 80% if the shortfall amount, or the part of it, is $1,000 or more; or
                     (b)  reduced to nil if the shortfall amount, or the part of it, is less than $1,000.
             ...
         (5)  If you voluntarily tell the Commissioner, in the *approved form, about your *shortfall amount or *scheme shortfall amount, or part of it, after the Commissioner tells you that a *tax audit is to be conducted of your financial affairs, the Commissioner may treat you as having done so before being told about the audit if the Commissioner considers it appropriate to do so in the circumstances.
...
298-20 Remission of penalty
(1) The Commissioner may remit all or a part of the penalty.
(2) If the Commissioner decides:
(a) not to remit the penalty; or
(b) to remit only part of the penalty;
the Commissioner must give written notice of the decision and the reasons for the decision to the entity.
Note: Section 25D of the Acts Interpretation Act 1901 sets out rules about the contents of a statement of reasons.”

BACKGROUND

5. The material facts in this case are not in dispute. When he migrated from the UK, Mr Hunt incurred certain expenses in relocating to Australia. On 13 September 2005, he lodged his 2004/2005 tax return, which was not prepared by a tax agent. On 15 May 2007, his 2005/2006 tax return was prepared and lodged on behalf of the applicant by a tax agent. On 23 July 2007, his 2006/2007 tax return was prepared and lodged on behalf of the applicant by the same tax agent. On 18 September 2008, his 2007/2008 tax return was prepared and lodged on behalf of the applicant by another tax agent.
6. On 20 August 2009, SAPOL apparently sent a letter to the police officers recruited from the UK, including Mr Hunt (Exhibit R2, page 1). The letter read:

“I am writing to advise you that SAPOL has been informed by the Australian Taxation Office (ATO) that it has become aware current and former police officers recruited by SAPOL from the United Kingdom may have been in receipt of potentially erroneous taxation advice. It is understood the nature of the advice that may have been provided to SAPOL personnel relates to claims for expenditure associated with a member’s relocation from the United Kingdom.
Advice received from Mr Geoff Whyte, Director of Employees and Investors at the ATO, in respect of the specific issue of claims that may have been submitted by SAPOL employees in respect of the costs of relocation from the UK to Australia, is as follows:
There are no taxation provisions that allow taxpayers (SAPOL Employees) to claim a tax deduction for relocation expenses. If any SAPOL employees have lodged income tax returns claiming any expenditure associated with their relocation from the UK (Airfares, stamp duty for sale of properties, food and accommodation etc) they should immediately make a voluntary disclosure and seek to have the claim excised from their income tax return. A voluntary disclosure that occurs prior to the commencement of an audit may result in reduced penalty for the lodgement of an incorrect return.
If you believe that the above information may relate to a taxation return made by you to the ATO since coming to Australia, the ATO has advised that you should contact Ricky Herbert of the Australian Taxation Office on 08 8208 1981.”

7. On 13 October 2009, an amended 2007/2008 tax return was prepared and lodged on behalf of the applicant by his tax agent, Cobiac & Chapman. In the tax return a claim of $40,206 for relocation expenses from the UK was made. The tax agent also prepared and lodged the applicant’s 2008/2009 tax return in which a claim of $41,179 relocation expenses from the UK was made. On 3 November 2009, the respondent wrote to Cobiac & Chapman advising that relocation expenditure was not an allowable deduction against the income derived by police employed by SAPOL. Following the notice of income tax audit sent to Mr Hunt (c/- Cobiac & Chapman), on 25 November 2009, his tax agent requested an amendment to remove the claims for relocation expenses in the 2007/2008 and the 2008/2009 tax returns. On 3 December 2009, a notice of assessment and liability to pay penalty for the 2007/2008 and 2008/2009 tax years issued to Mr Hunt. The notice stated that a penalty of $1,239.10 (for the 2007/2008 tax year) and $1,177.55 (for the 2008/2009 tax year) had been imposed for “recklessness”.
8. On 4 January 2010, the Mr Hunt lodged an objection against the notice of assessment and liability to pay penalty in which he stated:

“...
In around November 2008 I received a forwarded email though [sic] the SAPOL computer system. The original email had been started by Chief Inspector Keryl HOWIE (Manager, Personnel Section) and it implied that following discussions with Immigration SA it had become apparent that information had not been passed onto UK recruits in relation to amounts that may be claimed through a taxation return for Traveling [sic], Relocating and Living Away from Home expenses. (see attached document)
I read the attachment outlining when relocation benefits could be claimed. I considered that as I had signed a contract with SAPOL for employment in February 2005 and was actually employed by them in March 2005, prior to me selling my house in the UK and moving furniture and family to Australia, that I was entitled to claim relocation benefits.
The email had been forwarded on a number of times through other UK recruits. I no longer have my own copy of this email however I have obtained a copy from a colleague and enclose it for your information. I am able to say that the contents of this email are as I remembered them when I first received it.”

9. Mr Hunt provided a copy of the email from the Manager, Personnel Section with his objection. The email read:

“Subject: FW: Travelling, Relocating and Living Away from Home Allowances – Taxation Considerations
Following discussions with Immigration SA it has become apparent that information has not previously been supplied to members recruited through SAPOL’s UK recruiting program in relation to amounts that may be claimed through a taxation return for Travelling, Relocating and Living Away from Home expenses. The attached scanned document (I apologise for the quality) may assist in determining whether you may be entitled to any further claims as part of your move to Australia, which would make it worthwhile seeking further advice on such claims and entitlements.
Unfortunately SAPOL are not in a position to provide advice on the information attached. This is part of an Australian Taxation Office (ATO) document. It is provided only to advise that there may be areas of entitlement you have not previously considered because the on arrival packages provided to you did not include material of this nature.”

The forwarded email from the Manager, Personnel Section was originally dated 17 November 2008 and the attachment to the email set out what was described as “the type of benefits that qualify for concessional FBT treatment when they are provided to an employee who is relocating”.

EVIDENCE

10. In his evidence, Mr Hunt said he had arrived in Australia on 13 March 2005 as part of the recruitment drive by SAPOL. The email from the Manager, Personnel Section had been sent to him later than the date appearing on it (17 November 2008). He did not recall when he had received the email. He had read the attachment, but did not understand at the time that it related to the fringe benefits tax treatment of benefits provided to an employee who was relocating. He acknowledged that he had received the email and the attachment before the end of 2008. He had discussed the question of relocation expenses with another UK recruit to SAPOL (“CW”), but he was not working with other recruits who might have also been involved.
11. Mr Hunt was referred to the letter from SAPOL dated 20 August 2009. He said he could not recall receiving the letter, nor could he recall discussing it with other recruits. He said he would have received the letter from Cobiac & Chapman dated 28 August 2009 and would have “skimmed over it”. He had met Mr Rob Collins, an employee of Cobiac & Chapman, in October 2009 concerning claims for relocation expenses. Mr Collins said he could help him with his tax returns and Mr Hunt was told that claims for relocation expenses were legitimate and he would obtain tax deductions. If they were challenged, Cobiac & Chapman would support the claims.
12. Mr Hunt said that he had read the article in the Sunday Mail newspaper dated 20 September 2009 (Exhibit R7). The article had referred to the employee of an accountancy practice who had been advising and assisting many police recruits with their tax returns in which they claimed relocation expenses to Adelaide. He said he did not think that the article referred to Cobiac & Chapman or to Mr Collins, who he understood was still practising. He acknowledged that the article suggested that he could not claim a deduction for relocation expenses, but he had been advised by his tax agent that the expenditure was deductible, and there was nothing to suggest that Cobiac & Chapman was not a reputable tax agent. Although the article referred to an income tax class ruling about deductions that could be claimed against income, he did not see the connection between the article and the letter from Cobiac & Chapman that had referred to such a class ruling.

CONSIDERATION

Is the applicant liable for an administrative penalty under the TA Act?

13. Mr Hunt came to Australia in March 2005 having accepted a position with SAPOL. He incurred expenditure in relocating here. As an employee, the expenditure would have been tax deductible, if at all, in the year of income in which it was incurred. On the evidence, the expenditure was incurred in the 2004/2005 tax year. He prepared and lodged his 2004/2005 tax return on 13 September 2005. No deduction for the relocation expenditure was claimed by him in that tax return. In around November 2008, he received a forwarded email that had originally been instigated by Chief Inspector Keryl Howie, who was Manager, Personnel Section at SAPOL. The email suggested that information had not previously been supplied to members recruited through SAPOL’s UK recruiting program relating to amounts that might be claimed as tax deductions for relocation expenses. Attached to the email was a scanned document to assist recruits in determining what tax claims might be allowable upon relocation to Australia. The scanned document set out the type of benefits that would qualify for concessional fringe benefits tax treatment when provided to an employee who was relocating. Although Mr Hunt may not have appreciated it at the time, the information contained in the scanned document related to FBT concessions and, in my view, would have been of no assistance in determining the tax deductibility, for income tax purposes, of relocation expenditure.
14. According to his notice of objection (Exhibit R1, T13, pages 108-110), during 2009 Mr Hunt spoke to a number of UK recruits working for SAPOL who advised him that they had submitted tax returns and claimed deductions for work-related expenses, including relocation expenses. The claims had been allowed by the Australian Taxation Office (“ATO”). In October 2009, he met Mr Rob Collins who prepared and lodged an amended 2007/2008 tax return and a 2008/2009 tax return in which claims for relocation expenses from the UK were made. He said he had been advised that the claims were legitimate and that, should they be challenged by the ATO, Mr Collin’s firm would support their deductibility. Mr Hunt said that he was not familiar with the Australian taxation system and had no reason to doubt what Mr Collins was saying.
15. The administrative penalty regime was succinctly described by Mr S E Frost, Member, in Re Peco Necovski and Commissioner of Taxation [2009] AATA 195 where, at paragraphs 4-6, he said:

“4. The Parliament has established a ‘self assessment’ income tax system under which an assessment may issue based solely on information contained in the income tax return of the taxpayer.

5. 5. This self assessment system depends on the accuracy of the information contained in a taxpayer’s tax return. This is because, as a general rule, the Commissioner will accept a taxpayer’s return at face value. As part of the self assessment system, taxpayers are exposed to penalties when their returns contain statements that turn out to be incorrect.
6. 6. A taxpayer is liable to an administrative penalty if the taxpayer or the taxpayer’s agent makes a statement to the Commissioner which is false or misleading in a material particular and the taxpayer has a ‘shortfall amount’ as a result of the statement: s 284-75(1) in Schedule 1 to the Taxation Administration Act 1953 (‘TAA’).”
   
16. In my view, the respondent was correct, as a matter of law, in advising Cobiac & Chapman that a tax deduction for relocation expenses was not allowable against the income derived by police officers from SAPOL. As Mr Hunt or his tax agent made a statement to the respondent that Mr Hunt was entitled to claim a deduction for relocation expenses which was false or misleading and a shortfall amount of tax arose (or would have arisen) as a result of that statement, he is liable to an administrative penalty in accordance with s 284-75(1) of the TA Act. The base penalty amount is determined in accordance with the Table in s 284-90(1) of the TA Act and, as the respondent determined that the shortfall amount or part of it resulted from recklessness by Mr Hunt or his tax agent as to the operation of a taxation law, the base penalty amount was 50 percent of the shortfall amount. The provisions in Item 2 of the Table in s 284-90(1) could hardly be expressed more clearly. If the shortfall amount (or part of it) results from recklessness by either the taxpayer or the tax agent as to the operation of a taxation law, then the 50 percent penalty is automatic. That position is not altered if, for example, the agent was reckless while the taxpayer was not. Nor is it altered if the taxpayer was reckless while the agent was not. If either one of them is reckless, then the taxpayer becomes liable to the administrative penalty.
17. In the circumstances above, I am satisfied that Mr Hunt is liable for an administrative penalty under s 284-75(1) of the TA Act. The issue of recklessness and the level of the administrative penalty will be considered below.

Did the shortfall amount, or part of it, result from recklessness by the applicant or his tax agent as to the operation of a taxation law?

18. Miscellaneous Taxation Ruling MT 2008/1 sets out the respondent’s interpretation of the concept of “recklessness” used in Subdivision 284-B of the TA Act. Paragraph 102 of the Ruling suggests that recklessness assumes that the behaviour in question shows disregard of, or indifference to, a risk that is foreseeable by a reasonably person. Paragraph 102 also refers to the comments of Cooper J in BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164, where the learned Judge said (at paragraph 77):

“...Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.”

In my view, what is said in paragraph 102 of Ruling MT 2008/1 represents an accurate description of the concept of “recklessness” as it is referred to in Item 2 of the Table in s 284-90(1) of the TA Act. Moreover, it follows that, where a taxpayer uses a tax agent to help prepare and lodge a tax return, the taxpayer will be vicariously liable for any penalties caused by the agent providing information that results in a shortfall amount. Therefore, even in circumstances where it is considered that it is only the tax agent who behaves recklessly, the taxpayer who engages the agent to prepare and lodge his or her tax return will be liable for the penalty. As Mr Duggan noted, when a tax return is prepared and lodged by a tax agent, the taxpayer must make a declaration that the information contained in the return is true and correct. It is the taxpayer’s responsibility to ensure that the information contained in the tax return (or an amended tax return), that is lodged on their behalf, is correct.

19. In the present case, when his tax agent prepared and lodged his 2007/2008 amended tax return and his 2008/2009 tax return, Mr Hunt would have made a declaration that his claims for relocation expenses were allowable as deductions. On 20 August 2009, a letter was sent to him advising of potentially erroneous tax advice regarding the tax deductibility of relocation expenses. Mr Hunt said that he did not receive this letter. However, he did receive the email from Chief Inspector Keryl Howie at SAPOL in around November 2008 which should have alerted him to whether a tax deduction was allowable for his relocation expenses. Although the email and its attachment referred to benefits that qualified for concessional fringe benefits tax treatment when provided to an employee who was relocating, it made no reference to income tax deductions for relocation expenditure that might be allowable. The tax agent who prepared Mr Hunt’s 2007/2008 amended tax return and his 2008/2009 tax return should have been aware that a deduction for relocation expenses incurred when migrating from the UK to Australia for employment reasons might not be deductible for income tax purposes. Moreover, a reasonable tax agent should have known that a deduction for Mr Hunt’s relocation expenses could only be claimed in the tax return for the income year in which the expenses were incurred, and not in the 2007/2008 and 2008/2009 tax years .
20. In the circumstances, I am satisfied that Mr Hunt’s tax agent was reckless as to the operation of a taxation law in making a statement which was false or misleading in a material particular by claiming a deduction (or deductions) for relocation expenses, which were properly not allowable, in Mr Hunt’s 2007/2008 amended tax return and his 2008/2009 tax return.

Should the respondent exercise its discretion under the TA Act to remit the administrative penalty in whole or in part?

21. I note that a base penalty amount of 50 percent was applied in Mr Hunt’s case, correctly in my view, to the shortfall amount for the 2007/2008 and 2008/2009 tax years pursuant to Item 2 of the Table in s 284-90(1) of the TA Act. However, I note that the base penalty amount was reduced, pursuant to ss 284-225(1), (3) and (5) of the TA Act by 80 percent because the applicant was taken to have made a voluntary disclosure of a tax shortfall amount prior to the audit commencing. Consequently, the shortfall administrative penalty has been reduced from 50 percent to 10 percent.
22. Under s 298-20(1) of the TA Act, the respondent has the discretion to remit all or part of the administrative penalty of 10 percent that has been imposed in Mr Hunt’s case. Having regard to what occurred and the fact that the shortfall amount resulted from the disregard of, or the indifference to, a risk that was foreseeable by Mr Hunt’s tax agent as a reasonable person, it is appropriate that an administrative penalty should be imposed and no remission is warranted.

DECISION

23. For the reasons outlined above, the Tribunal affirms the objection decision under review.
    

I certify that the 23 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member R W Dunne

Signed: ...............J Coulthard..........................................

Associate

Date of Hearing 21 December 2010

Date of Decision 9 February 2011

Advocate for the Applicant Self-represented

Counsel for the Respondent Mr T Duggan

Solicitor for the Respondent ATO Legal Services Branch