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CASE 3/2003

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2003] AATA 568

Decision date: 18 June 2003

J Block (Deputy President)

Part A: Introduction, background and general.

1. The objection decisions in this matter relate to the disallowance by the Respondent of objections dated 26 May 1999 against assessments dated 31 March 1999 in respect of each of the years ending 30 June 1987 to 30 June 1992 (both years inclusive). The tax years aforesaid are collectively referred to as the ``relevant years'' and each is a ``relevant year''; in some instances a relevant year is referred to in brief by reference to its actual year, eg the 1991 year.

2. Mr. Charles Robinson of Counsel, instructed by Blake Dawson Waldron, solicitors, appeared for the Applicant while Mr D.B. McGovern S.C. of Counsel, instructed by Ms L. Wild of the Australian Taxation Office (``ATO'') appeared for the Respondent.

3. The Tribunal had before it, the T- Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (``AAT Act'') together with a large number of exhibits which are detailed in Annexure A.

4. This is a case in which the Applicant has been quite extraordinarily dilatory. After his objections were disallowed, he sought review by this Tribunal. The Applicant repeatedly and consistently failed to comply with directions by this Tribunal, culminating on 8 February 2002 in the dismissal of his applications by this Tribunal under section 42A(5) of the AAT Act.

5. The Applicant then sought reinstatement of his applications under section 42A(8) of the AAT Act. By a decision given by me on 28 June 2002 and reported at (2002) 68 ALD 143; (2002) 50 ATR 1038, I granted the reinstatement application. I held that in dismissing the applications on 8 February 2002, I was in error in that I could have allowed the Applicant to proceed on the documents then in existence. I should note that at the date of dismissal, the only witness statement in respect of the Applicant then before the Tribunal was Exhibit A2. That exhibit could aptly be described as brief hand-written notes only, rather than as a witness statement. In my decision in reinstating the applications, I noted that although on the papers and documents then before the Tribunal, it might have been difficult for the Applicant to discharge the onus of proof on him in relation to the merits proper, those papers and documents might have been sufficient for the purpose of determining the penalties question. The background against which the applications were dismissed was set out in the reinstatement decision in the following terms:

[Background omitted]

In dismissing the applications on 8 February 2002, I commenced by setting out the content of an affidavit by David William Morris dated 8 January 2002, and then went on to say:

``I do not propose to read into the transcript the annexures, save and except, the direction dated 18 October 2001, which reads:

`A direction hearing was held on 18 October 2001, at the request of the respondent. Counsel for the applicant

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accepted and advised the Tribunal accordingly that the applicant has failed to comply with direction 1, given by the Tribunal on 18 June 2001, and requiring the applicant to furnish the statements of all witnesses upon whose evidence he intends to rely by not later than 20 August 2001. The Tribunal was advised that the applicant's failure was attributable inter alia to marital difficulties in certain proceedings, not specified in the Federal Court. It was made clear to the Tribunal that the applicant's professional advisers were hampered by the applicant's failure to furnish instructions. It was noted also that the objection decision in question relates to the 1987 to 1992 tax years. The Tribunal decided at the request of his counsel to allow the applicant a further opportunity within which to comply with direction 1, given on 18 June 2001. Moreover, the Tribunal decided again, at the request of the applicant's counsel, to allow the full period requested, namely 2 months, notwithstanding that having regard to what has transpired, such period might appear to be unduly long. Accordingly, the directions of the Tribunal are:
  • 1. the applicant must within 2 months of 18 October 2001 furnish the statements of all witnesses upon who he intends to rely;
  • 2. the respondent must furnish the statements of such witnesses, if any, upon whom he seeks to rely within 6 weeks of compliance by the applicant with direction 1;
  • 3. the Tribunal made it clear to the applicant that it would be reluctant to grant him any further extension for indulgences and so that a further failure may, in the absence of good and proper cause, such as severe illness, in respect of which medical evidence is produced, result in a dismissal.'

The applicant appeared in person today. He advised the Tribunal that his counsel is not available. He said that he had certain documents which were nearing completion, and he also informed the Tribunal as to certain criminal proceedings, in which apparently he was successful. However, he did not advance any reason of the nature set out in direction 3 of the direction dated 18 October 2001, as to why he should be granted yet further extensions, more particularly having regard to the fact that he has a history of failing to comply with directions by this Tribunal, going back for a very lengthy period indeed.

I note in particular that on 18 October 2001, when the applicant was represented by counsel and as set out in the direction, I made it clear that I would grant one further and final extension of a very lengthy period, namely 2 months, within which the applicant could comply with the direction. Again, as set out in that direction I made it perfectly clear that in the absence of a very good reason I would be disinclined to grant any further extensions. It is my view that this Tribunal has already been over- indulgent to this applicant, who has failed not once, but repeatedly, to comply with directions of this Tribunal.

The respondent has applied for the dismissal of this application pursuant to the Administrative Appeals Tribunal Act and it appears to me that this is a proper case for dismissal in all the circumstances. Accordingly, it is dismissed pursuant to section 42A(5) of the Administrative Appeals Tribunal Act. The Tribunal is adjourned.''

6. As set out in brief previously, I noted in the reinstatement decision that for the Applicant to proceed on the documents then before the Tribunal might have been sufficient to enable the Applicant to contest the penalties assessed against him. The relevant clause in that decision reads as follows:

``The Applicant had repeatedly sought extensions of time within which to furnish written statements. I dismissed the applications under subsection (5) of section 42A of the Act in the exercise of discretionary powers, and having regards to the Applicant's repeated and consistent failures detailed earlier in these Reasons. It might be thought that the Applicant deserved dismissal in all the circumstances in the light of those consistent failures, and having regard to the altogether cavalier manner in which he treated directions by

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this Tribunal. But there is another view; it is arguable that it would have been preferable for me to offer the Applicant the opportunity of proceeding to a hearing on the papers before me, and being of course the T documents. There is a possibility that he would have accepted; as to whether he could have run his case on the basis of the T documents alone, and having regard to the nature of the issues as described to me by Mr. Robinson, is another matter. The Applicant was self-represented and deserving of special consideration; the fact that this offer was not made may have resulted in prejudice (and a denial of natural justice) to the Applicant, and constituted, in my view, and on reflection, an error.''

7. Having succeeded in achieving the reinstatement of his applications, the Applicant continued to be dilatory. His own witness statement in the form of an affidavit was handed to the Respondent on 2 December 2002 (a Monday and the first hearing day). That statement (Exhibit A1) was in fact the final form of a draft which had been produced to the Respondent in a somewhat different form at about 5:00 p.m. on the preceding Friday. Moreover, on 25 November 2002, the Applicant caused summonses to produce to be issued against the Bank and the Respondent. Those summonses will be dealt with in more detail later in these reasons.

8. The hearing of this case took place during 5 hearing days and being 2, 3 and 4 December 2002 and 30 and 31 January 2003. The 2 December 2002 date is referred to as the ``first hearing day'' or ``1st hearing day'' or ``1st day''; similar references are used for the succeeding hearing days. References to the transcript (which was not numbered consecutively) and which commenced for each hearing day with page 1 are referred to by the numeral referable to the hearing day followed by TS, to distinguish references to the transcript from references to the T-Documents.

9. On the 5th day and final day, a timetable for written submissions dealing with the evidence and containing the submissions of the parties was agreed. Under that agreed regime, the Applicant had until the end of February 2002, with the Respondent being granted 2 weeks to reply and the Applicant a further 2 weeks thereafter to respond. I should in fairness make it clear that I said that I would not expect strict compliance with the timetable and would allow some degree of latitude. In March 2003, the Applicant sought and obtained an extension until 3 April 2003. In fact, the Applicant did not comply by that latter date or thereafter and on 20 May 2003, the Respondent filed his submissions with the request that the matter be dealt with by the Tribunal, on the documents and evidence before it and without further delay. However, a few days later, the Applicant did file submissions; they came under cover of an apology by Mr Robinson but with no explanation for the delay, which, it must be said, fell well outside the latitude contemplated when the timetable was agreed on the 5th day.

10. The submissions of the parties (albeit belated in the case of the Applicant) are of such relevance that I have decided to attach them as Annexure B in the case of the Respondent's submissions and Annexure C in the case of those of the Applicant. Each set of submissions has been edited to preserve confidentiality on the basis set out in paragraph 11 below. Similarly, extracts from the transcript have been edited in the same manner.

11. The actual name of the Applicant has been replaced by a simple reference to the Applicant. The four companies have been assigned names in replacement for their real names and in each case so as to utilise the same first initial. Thus the names used are Apple Holdings Pty Limited, Ripe Pty Limited, Pope Pty Limited and Number Holdings Pty Limited. The alleged partnerships have been renamed correspondingly and so that the first word of each company name refers, as the context requires, to the relevant company or the relevant partnership.

In respect of each of Ripe and Pope, the participants were the Applicant, two brothers (John and James) and Stephen. John and James (who are collectively referred to as the ``Brothers'') were in fact two of four brothers involved in a refrigeration business. Stephen was involved in a different business altogether.

In respect of Number, the participants were the Applicant and Messrs Bland and Hunt. Bland was a prominent person in a public area. An even more prominent person in the public area and who is referred to as Adams became involved at a later stage as a participant in Number.

I use the term ``Bank'' to refer to a major commercial bank from which and through one

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of its suburban branches (``Branch''), substantial amounts were borrowed by each of Ripe, Pope and Number.

The term ``Auditors'' refers to a major accounting firm in which the Applicant was until 1985, a manager and in which Jane was and is a senior employee and in which Peter was and is a partner. Each of Jane and Peter gave evidence as did Michael, a former employee of the Auditors. Lily and Mary, both former employees of the Applicant also gave evidence.

``Brighton'' refers to a suburb in Sydney and also the name of a street in that suburb in which Ripe purchased real property in 1985 and thereafter. ``Maryland'' refers to a country town in New South Wales in which Pope purchased real property. Number acquired real property in Brighton and also in two other suburbs in Sydney; their real names have been altered so as to refer to Westville and Eastville respectively and the street names referable to those suburbs have been altered correspondingly.

In some cases, real first names (but only where they are common) have been used. Where identification might be possible because of connections (e.g. in relation to persons in the firm of Auditors), alterations to the first names have been made. The parties and their advisers will find it easy to make the appropriate connection in respect of a person or company because in all cases, save one, the first initial has been retained; this is not so in the case of Adams. In a number of cases, I have deleted a word or a reference and with a notation as to deletion, but without any substitution, simply because it was felt that the inclusion of the reference might perhaps endanger the confidential nature of this decision. In all cases, I have used names in the belief that this has the effect that the decision is easier to read than would be the case were they to be referred to by letters.

12. I have not so far referred to yet another relevant entity. Apple or Apple Holdings Pty Limited refers to yet another enterprise. There was throughout the hearing some uncertainty as to whether the Applicant intended to pursue his claim in respect of losses sustained by Apple. Mr Robinson made statements in this regard which were to some (very minor) extent contradictory. However, clause 8 of Annexure C makes it clear that I need not be further concerned in relation to Apple. I note in any event that as originally conceived, Apple was to involve a family trust associated with the Applicant and so that in any event, the Applicant would not have been entitled to a deduction for a share of Apple's losses.

13. This case generated a large quantity of evidence both oral and in writing, many exhibits (in part being voluminous documentation furnished by the Bank in answer to the summons), lengthy T-Documents and the submissions of the parties; there are however in reality only two issues. The first issue (the ``merits issue'') requires me to consider whether three companies were in fact companies in the sense that they were the legal and beneficial owners of real and other property, or whether and by contrast they were merely nominees for partnerships. The former contention is made by the Respondent and the latter by the Applicant. The second issue (the ``penalty issue'') concerns the additional tax assessed under sections 222 and 223 of the Income Tax Assessment Act 1936 (``ITAA'') and remitted in part under section 227(3) of ITAA.

14. The merits issue arises simply from the fact that Ripe and Pope to a very large extent and Number to a lesser extent were unsuccessful and incurred losses. If in each case, the losses were sustained by partnerships then through the operation of section 92 of ITAA, the participants as partners would be entitled to deductions for their respective shares of those losses. If by contrast, those entities were in fact companies owning their assets beneficially, then the losses would be locked up in the companies themselves and capable of giving rise to carry-forward losses. At an early stage, at least in respect of Ripe, the Applicant and the other participants in Ripe contemplated a unit trust structure; if in any case, Ripe had held on trust for a unit trust, the losses would be have been locked into that trust.

15. I have previously referred to the summons to produce issued in late November against the Bank. During the afternoon of the 1st day, the Bank produced a very large body of documentation (nine large folders) which was of necessity considered by the parties that night. The Bank subsequently produced further documents. The Applicant's evidence was that a formal written partnership agreement was entered into in respect of each of Ripe and Pope

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and that those agreements were produced to the Bank who retained copies of them. The Applicant's evidence was also that no such formal written partnership agreement was entered into in respect of Number. The evidence in respect of Number was quite remarkably complex and at times difficult to comprehend. Although Number commenced as a real property owning enterprise, it diversified into a large-scale agricultural business and in consequence of which real property was sold. Bland and Hunt at some point went out of Number and the participants in Number came to be the Applicant and Adams. The Applicant said that he is now on very bad terms with Adams. Adams was not called to give evidence; nor for that matter were Bland, Hunt, John, Stephen or the personal representative of James who died in 1993.

16. In respect of the first five relevant years (the 1987 year to the 1991 year, both years inclusive), the Applicant's tax returns were filed in August 1992, and then only after an audit of his affairs by the ATO had commenced and after the ATO had given him a deadline within which to do so. In respect of the first relevant year, the Applicant's return was about 5 years late. The Applicant's tax return for the last relevant year (the year ending 30 June 1992) was submitted in 1995.

17. The Applicant was at all relevant times a qualified accountant. By 1985, he was a manager in the Auditors and he had previously become a tax agent, as was required of managers in the Auditors. To become a tax agent requires an aspirant to establish knowledge and experience of tax matters over a broad spectrum. On his evidence before the Tribunal, the Applicant would have found it difficult to qualify as a tax agent. In essence, the Respondent contended (contrary to the Applicant's assertion) that each of Ripe, Pope and Number were corporate entities and in which the alleged ``partners'' were in fact shareholders. The Respondent's contention was that the assertion by the Applicant that Ripe, Pope and Number were in fact partnerships was very much of an afterthought dreamed up only when he was compelled to file returns (belatedly), and after the entities in question had incurred substantial losses. It was on this basis, so the Respondent contended, that it was only in 1992 that the Respondent first sought to claim his share of losses as an alleged partner. Of course the onus was always upon the Applicant to establish that each of Ripe, Pope and Number was in fact a partnership and not a corporate entity.

18. The Applicant said that in respect of Ripe, it was originally contemplated that the relevant entity would be a unit trust with a corporate trustee, and indeed an attempt was made to obtain a certain name for the trust and the corporate trustee. That name proving unavailable, the company was styled ``Ripe''. The Applicant said that the Brothers were interested primarily in preserving their anonymity and confidentiality both in relation to the world at large and also in relation to their other two brothers with whom they were associated in another (unrelated) real property venture. Stephen too was concerned about this aspect. All of them wanted to use one entity for the purpose of acquisition, borrowing, leasing and similar or related acts. He said that although they originally contemplated the use of a unit trust the parties changed their minds in favour of a partnership structure after he, the Applicant, consulted Peter. The Applicant said that Lily prepared the partnership agreements for Ripe and Pope and that for this purpose, use was made of a standard short-form partnership agreement precedent given to him by Peter. Indeed, it was so simple, that it required only the insertion of the Bank's account details. Peter, in his evidence, confirmed that it was a short precedent and talked of a ``one-pager''. The precedent tendered as Exhibit A12 is certainly very brief; indeed, in double or wide spacing, it is a little over 3 pages, but it does require rather more than the simple insertion of the Bank's account details. Moreover, the precedent, tendered on the basis that it was used for the purpose of preparing partnership agreements, was in my view defective in one important respect, in that the nominee company is not a party to it or even mentioned in it; there is thus nothing to connect the relevant company (alleged to be a nominee) and the alleged relevant partnership. Where a partnership employs a nominee to hold property for it, it would be usual, in my experience, for the nominee to seek certain indemnities from the participants (in respect of liabilities lawfully incurred) and to grant indemnities in respect of any acts in breach of its obligations; there might similarly be provision for the removal of the nominee and its replacement. Peter, in his

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evidence, said that he would expect the trust to be dealt with in a separate declaration of trust; the stamp duty consequences of such a declaration at the relevant time of involving the parties might perhaps have been adverse.

19. The Applicant was at all times firm about the fact that the partnership agreements in respect of Ripe and Pope were prepared and executed and that copies were given to the Bank. It was common cause that notwithstanding the fact that the Bank produced many volumes of documents it did not produce any partnership agreements. In respect of all real property acquisitions, mortgages and loan documentation, the Bank documentation made no mention of any partnership, but was rather in all cases framed on the basis that the relevant company was the borrower and legal and beneficial owner of the relevant property; guarantees by the participants were required and furnished. Focussing on Ripe and Pope, the Applicant, the Brothers and Stephen executed a standard form guarantee. There is no suggestion anywhere in the Bank documentation that the Bank was dealing with any partnership and indeed were this the case, the ``partners'' would, as a matter of law, be personally liable and responsible for the partnership debts and in consequence of which personal guarantees would not be necessary. The documentation could take a different form and in which the ``partners'' could acknowledge their liability as primary debtors. The Applicant contended that the documents were drawn in this ``vanilla'' fashion as a matter of convenience. Such a contention cannot be tenable more particularly having regard to the action instituted by the Bank against, inter alia, the guarantors and including the Applicant. His defence was firstly a denial that he executed the guarantee coupled with a claim for Contract Reviews Act 1980 (NSW) relief (in particular on the basis that he was denied access to independent advice) and there was no suggestion anywhere in the defence that the Bank was aware that the true position was that it had lent to partnerships.

20. The preceding clauses in this Part A include comments of a general nature and in particular as to the evidence of the Applicant. His evidence is dealt with in more detail in later parts; separate parts have been used to take account of the fact that other witnesses were interposed during his evidence, and so that his evidence was given, so-to-speak, in tranches.

21. The transcript reveals that most of the evidence at the hearing related to Ripe and Pope with comparatively little evidence in respect of Number, although what evidence there was on Number was usually complex. A substantial part of the losses claimed relate to Ripe and Pope; having regard to the fact that the participants in Ripe and Pope were the same, the borrowings of these two entities from the Bank were cross-collateralised.

22. During the 5 hearing days, there was considerable evidence before me as to purchases of real property by Ripe and Pope and the circumstances in which the investments were made, and in some cases the reasons why they failed and thus resulting in losses. Particularly in relation to Pope, real property in Maryland was purchased from and leased back to an anchor tenant and without obtaining any personal guarantees. The failure of the anchor tenant to perform its lease obligations in respect of premises specially fitted out for it was to have serious consequences for Pope and also, because of the cross-collateralisation arrange- ments, Ripe. At an early stage of the hearing, there was a discussion of whether there might be an issue of whether the losses were on capital or income account. In fact, this issue was not, during the hearings, raised again and there was no evidence as to how the losses arose. It became clear that the merits issue requires a decision purely as to whether the Applicant had established that there were in fact partnerships. Nor does the merits issue require me to have regard to the actual nature of the properties acquired, the prices paid, the finance taken and the amounts (where relevant) realised on sale.

23 (a) During the course of a brief opening address, Mr Robinson advised me that the entities were structured as partnerships to give the participants the benefits of negative gearing ( 1TS20 ). In fact, Mr McGovern elicited in cross-examination that during the period from 1985 to 1987, the benefits of negative gearing were severely limited. The Applicant said that the first Ripe property was purchased prior to the coming into force of the relevant legislation. This may have been true of the first property purchased, but not of properties purchased thereafter.

(b) Mr McGovern noted ( 1TS23 ) that until 5:00 p.m. on the preceding Friday (29 November 2002), the evidence of the Applicant

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consisted of the handwritten notes which are Exhibit A2. As I have noted, the Respondent received an incomplete draft of Exhibit A1 which in its final form was different in some respects, and so that the Respondent (so I was informed) first received a complete witness statement for the Applicant on the morning of the 1st day.

Part B: the evidence of the Applicant.

24. The Applicant commenced his evidence in chief by confirming the truth of his witness statement, Exhibit A1 ( 1TS26 ).

25. In 1985, the Applicant was working in the Parramatta office of the Auditors. The Brothers were clients of the Auditors; so for that matter was Stephen a client of the Auditors. The four of them took a decision to invest in real property; as originally envisaged, the Applicant was to have a 10% carried interest but in the result the four participants participated equally in each of Ripe and Pope. The Applicant left the employ of the Auditors in 1985.

26. The Applicant originally thought that a unit trust structure would be appropriate. Confidentiality was important ( 1TS32 ) and in addition, the participants wished to contract though one entity. A discussion with Peter resulted (according to the Applicant) in a change to a partnership structure.

27. The first enterprises were referable to Ripe and Pope. As regards the alleged partnership agreement, I refer to the following extract from 1TS33 :

``After following that conversation you did something about putting the arrangement into place? - Yes, I did.

You have mentioned to the Deputy President that you entered into a partnership agreement with your partners? - Yes, we did.

Do you have that document here today? - No, I don't.

Is it in your possession anywhere? - No, it is not.

Have you any idea where it is? - The partnership agreement was given to the [ Bank Manager] at [Branch] around about late 1985 or early '86. At that stage we had identified a property to purchase. I remember I procured a shelf company which was [Ripe Pty Limited]. In the first instance I acquired the company consistent with I think the minutes that I was authorised to do so that we had looked at before. In the first instance I set the account up as a trustee account because it was just supposed to hold some funds together for us to look at opportunities. When we got to acquiring a property and having passed on the information to the partners that this is what I had heard from [Peter] and I put it to them that this was a way that they could avail themselves of what they wanted with their wishes and basically remain behind another legal entity. I then got their concurrence and went to the [Bank] and changed the bank account. Within a matter of months I would suggest from the initial bit to [Ripe Pty Limited] nominee account.''

28. There was considerable evidence before me as to the manner in which cheques were drawn and issued by Ripe and Pope. There was in particular evidence as to accounts originally described as trustee accounts which were later changed to refer to nominee accounts.

29. In respect of all of the real property acquisitions, moneys were borrowed from the Bank; those moneys constituted a part of the purchase price of each parcel of real property. The balance (and legal costs and duty) was contributed by the participants. There were no books of account of any kind in evidence before me which would inform me as to how moneys contributed by the participants were recorded. There are of course a number of possibilities and including share and/or loan capital in the books of the companies or by way of capital contribution to partnerships. In particular, no books of account of any kind in respect of the alleged partnerships were produced in evidence before me.

30. I have previously noted, in respect of Ripe, that the Applicant's evidence was that the four natural persons were themselves the participants, or so the Applicant alleges, the partners. However, and in respect of Pope, the Brothers elected to participate through their respective family trusts and not personally and so that the four participants would have been the Applicant, Stephen and the family trusts referable to the Brothers ( 1TS38 ). Personal guarantees were given for each of the Ripe and Pope loans and all of the loans were cross- collateralised ( 1TS38 ). The Applicant was asked why in fact two nominees were needed

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and he answered that ``it was cleaner for our purpose.''

31. After the Applicant left the Auditors, he set up an office of his own. He engaged Lily as a secretary to work in the office. I asked him why he needed a full-time secretary.

[Extract from ITS40 omitted]

(Lily when she came to give evidence, said that she worked for the Applicant on 1 or 2 days each week and for the refrigeration business, referable to the Brothers, for either 3 or 4 days each week).

32. The Applicant was firm as to the fact that the partnership tax file numbers (``TFNs'') were obtained.

[Extract from ITS42 omitted]

33. Ripe also acquired a half interest in a restaurant in Queensland. Its 50% partner (``Paul'') was experienced in restaurant management and no written agreement was entered into with Paul.

[Extract from ITS45 omitted]

34. The Applicant said the partnership agreements used for each of Ripe and Pope were seven or eight page documents and for which purpose it was necessary only to insert the name of the partners, the date and the Bank account details. See 1TS45 .

(In fact and as I have indicated, Exhibit A12 is a very short document indeed, being just over 3 pages in very wide-spaced typing; it is in fact aptly characterised as very simple form indeed.)

35. The Applicant's evidence as to the state of his knowledge of law in general and tax law in particular was decidedly odd. Although he was a manager of a leading firm of Auditors, and although he was a tax agent, his returns for the first five relevant years were lodged well out of time (in 1992) and only after the ATO commenced an audit and insisted that the returns be submitted. The Applicant said (on more than one occasion) that he had paid the tax due through salary PAYE deductions and that his partnership loss deductions in fact entitled him to large refunds. He also said (more than once) that in these circumstances, he was under no legal obligation to put in tax returns.

If the Applicant was in fact entitled to large refunds, one can only wonder at his failure to put in his returns and so as to receive refund cheques. It was, it must be remembered, during this period that the Applicant came under financial pressure from the Bank and so that tax refund cheques of substantial size would surely have been useful to him. His statement to the effect that he was not legally obliged to file returns was of course ludicrous. It was also put to him that the use of a trust structure would have locked losses into the trust. (Mr Robinson pointed out in this context that interest incurred in order to fund the acquisition of units in a unit trust might in certain circumstances be deductible to the borrower; I consider that there may perhaps be some merit in this suggestion but it is unnecessary for me to deal with it further).

36. As I have noted there was very little evidence as regards Number; however the Applicant said at 1TS59 and 60 :

``Could we just turn to this other company [ Number]? This started in 1988; is that correct? - I'm not sure of the precise date but it was around about that time.

This again was a partnership you said concerning [Hunt] and [Bland]? - That's correct.

Could you just tell the Deputy President what brought you together? - [Bland] and [ Hunt] were known to me from the meat business that my family was in. They were customers of theirs at [deleted]. They approached me probably a year before, maybe even longer, a year to two years before we had any involvement together. They were looking to acquire some property. They had a long-standing business called [Bland and Hunt Pty Limited] and there was basically two partners who knew me, knew of me, knew what I did and they approached me to basically look around and go into a property deal.

All right. What did you do? - I met with them at my office on numerous occasions for the normal business of the meat trade. They were aware - I had pointed out to them what properties we had on [Brighton] Road including the one that they were physically in and across the road at that stage, that had been completed, and I looked at three further properties along [Brighton] Road which I put to [Bland] and to [Hunt]; one was the old [Bank] on the corner of [ Brighton] Road and - it's the second block below the railway station. I looked at

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the old [deleted] store on the top side of the railway station and another premises that was on the market that we looked at right next to [Brighton] opposite [deleted]. In the end there was offers made over a period of time for all three and the first one was - sorry, the one that was accepted and was acquired was the old [deleted] store at the top end of [Brighton] Road.

Through what structure was it acquired? - The identical structure to what [Ripe] and [ Pope] was. I explained to them how it would work. We purchased a shelf company called [Number Pty Limited]. We then changed its name to [Number Holdings Pty Limited]. Initially the shareholding was set up as 40 per cent, 40 per cent, 20 per cent. That's all I could afford at the time and we acquired that first property.''

37. I have previously noted that the Applicant filed his returns for the first five relevant years only after an ATO deadline and demand: 1TS74 .

38. As to the Applicant's failure to file tax returns...

[Extracts from ITS75-ITS78 omitted]

40. I have so far dealt with the transcript for the 1st hearing day. At the end of the first hearing day, the parties had an opportunity to consider the 9 box files of documents furnished by the Bank and from which it became clear that the Bank had produced no partnership agreements.

41. In addition to his summons to produce dated 25 November 2002 addressed to the Bank, the Applicant issued a summons of the same date on the ATO calling on it to produce the following documents:

``1. All documents, including without limitation, all correspondence, diary notes, file notes of telephone discussions... [part omitted]... relating to an application for a tax file number for any one or more of [Ripe Pty Limited], [Pope Pty Limited], the [Ripe Partnership] and the [Pope Partnership] made in the period between 1985 and 1988 inclusive.

2. All income tax returns lodged by any one or more of the [Ripe Partnership], the [Pope Partnership], [Ripe Pty Limited] and [Pope Pty Limited] for the period between 1984 and 1995 inclusive.''

In answer to that summons, the Respondent produced one document which was tendered as Exhibit R1 and which reads as follows:

``Pope Pty Limited

(address deleted)

Taxpayer company is a non-lodger who has not lodged a return. It is requested that a Tax File Number be allocated so that audit action may be taken.''

The subsequent evidence made it clear that neither of Ripe Partnership or Pope Partnership ever applied for a TFN or ever rendered any returns. The summons to produce was deservedly criticised in strong terms.

42. It was at the beginning of the 2nd day that mention was made of the fact that it did not seem as if any of the alleged partners in any of the alleged partnerships was to be called. Mr Robinson informed me that Hunt had brought a private fraud prosecution against the Applicant; he said that the principle in
Jones v Dunkel (1959) 101 CLR 298, was relevant so far as he was concerned: 2TS10 .

43. James, who was one of the Brothers, died in 1993. The Applicant said that his relationship with James was good until his death. However, John, who is still engaged in defending the action brought by the Bank against Ripe, Pope, John, Steven and the Applicant said that ``it was in his best interests to take his legal advice and not really have a relationship with me.'' ( 2TS14 ).

44. The Applicant said also that Stephen had settled with the Bank but that Stephen's wife and daughter were very upset with him. I refer to his evidence at 2TS14 .

45. The Applicant said that Adams had been particularly aggressive towards him: 2TS15 .

46. At the beginning of the 2nd day, the Respondent reverted to the question of why the Applicant did not file his returns.

[Extracts from 2TS17 and 2TS34 omitted]

48. During the course of his evidence, the Applicant made mention of the delay between rendition of returns and the assessments. There was evidence before me as to interviews with the ATO and correspondence with the ATO (and including a position paper by the ATO to which the Applicant did not respond.) There was also a prosecution of the Applicant under section 8C of the Taxation Administration Act 1953 for failure to furnish information required

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under a notice pursuant to section 264 of ITAA. The Applicant's evidence in this regard was particularly evasive.

[Extracts from 2TS37-49 omitted]

49. The Applicant admitted that no returns were ever lodged for any of the alleged partnerships ( 2TS49 ). This led to a question by Mr McGovern as to why in these circumstances, the Applicant served a notice to produce calling for such returns.

[Extract from 2TS49 and 2TS50 omitted]

50. It will be noted then that Applicant contended ( 2TS50 ) that Ripe and Pope did, as partnerships, make applications for TFNs. It was put to the Applicant that Lily had said in her witness statement that she applied for TFNs for Ripe and Pope as companies ( 2TS53 ). But as appears from 2TS54 , the Applicant was nevertheless still contending that TFNs were applied for by the partnerships.

[Extract from 2TS54 omitted]

51.  2TS55 records that Mr McGovern called for all books and records of the Ripe partnership and of the Pope partnership. Mr Robinson answered that none were produced.

52. Specifically in relation to Pope, the Applicant admitted that it did not lodge returns and in consequence of which the ATO allotted a TFN (Exhibit R1 and 2TS57 ).

53. [Cross-examination at 2TS63 omitted]

54. I have previously noted that it was originally contemplated that Ripe would hold the real property on trust for a unit trust; the minute of 28 March 1985 [a handwritten document attached to the applicant's affidavit purportedly being a copy of minutes of a meeting] anticipated that the name of the trust and the name of the company would be the same. That name was unavailable and in consequence of which another name (Ripe) was chosen.

55. [Extract fro 2TS77 and 78 omitted]

56. The Applicant agreed that he was aware of the fact that negative gearing benefits were limited between 1 July 1985 and 30 June 1987 ( 2TS84 ).

57. [Extract as to negative gearing and partnership agreements from 2TS85 to 90 omitted]

58. On the 3rd hearing day, the Applicant was still giving evidence. He continued to maintain that the Pipe and Pope partnerships agreements had been furnished to the Bank.

[Extract from 3TS6 and 7 omitted]

Part C: the evidence of Lily.

59. At 10:46 a.m. on the 3rd hearing day, Lily was interposed as a witness. She is currently a solicitor in Sydney; she worked for the Applicant as a secretary from mid 1986 to 1988. Lily said that Rope and Pipe were companies with various forms of investments. She also said that she believed that they were nominees for a partnership based on what the Applicant had told her about them.

In cross-examination, Lily said that, to the best of her recollection, she applied for TFNs for Ripe and Pope as companies ( 3TS13 ).

[Extracts from 3TS14 and 15 omitted]

60. Understandably enough, after all this time, Lily could not remember very much. It should also be remembered that she spent much of her time in the refrigeration business. I consider that Lily was a credible witness but that her evidence was, if anything, against the Applicant in that she said that TFNs were applied for by Ripe and Pope as companies and not as partnerships.

Part D: the evidence of the Applicant resumed.

61. After Lily had given evidence, the Applicant resumed his evidence. At 2TS30 and 31 , he again said that partnership agreements were provided to the Bank.

62. A question arose as to the authenticity of what was referred to as the red book, which was originally marked for identification and then tendered as an exhibit. It would appear that a relevant minute was written by the Applicant both with a blue pen and with a black pen.

63. [Extract from 3TS43 omitted]

64. Exhibit R3 is a cheque drawn dated 5 June 1986 drawn by Ripe. It indicates that a year after the alleged decision to use a partnership structure, Ripe nevertheless drew a cheque indicating a trust relationship.

65. The Applicant was cross-examined as to the fact that a search of Ripe and Pope revealed that while their activities were not at first described as nominee companies, a change was made in the relevant records after 1990 so as to adopt his description ( 3TS50 and 51 ).

66. The Applicant said that Lily probably ``did the partnership agreement'' ( 3TS55 ). Lily had not in her evidence made any such

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assertion. If she had drawn partnership agreements while still a secretary, it is likely in my view that she would have remembered doing so.

67. It would appear that steps to change the description of Ripe and Pope (to reflect nominee activities) were taken after 22 July 1993 ( 3TS57 ).

68. As to the guarantee in favour of the Bank, Mr McGovern put it to the Applicant that if there had been a partnership agreement, the liability of the partners would have been primary rather than as guarantors. The Applicant answered: ``I understand you'' ( 3TS61 ). The Applicant again said that he had no obligation to file returns ( 3TS64 ). In relation to Number, the Applicant admitted that there was no piece of evidence to which he could point which indicated that Number was the agent for him, Bland and Hunt.

69. It was put to the Applicant that in his negotiations with the Bank after financial difficulties had been encountered, he made proposals which involved a transfer of Ripe and Pope so as to take advantage of their tax losses.

70. In an application for private bag/locked bag facilities, Ripe and Pope were described by the Applicant as property investment companies ( 3TS73 ).

71. It was put to the Applicant that the Bank prepared documents in accordance with information provided by him, which indicated that Ripe and Pope had been used as property investment companies for the directors and shareholders. The Applicant's answer was ``yes'' ( 3TS76 ).

72. [Extracts from 3TS77, 78, 80, 87 and 88]

Part E: the evidence of Jane.

74. Jane was interposed as a witness at the beginning of the fourth day. She said that based on information which had been provided by the Applicant, Ripe and Pope were nominees for partnerships.

75 Jane said that the Auditors did not prepare any partnership returns; in fact she said that she knew that such returns were not prepared. However, each of John and James who were clients of the Auditors filed returns in which they claimed a quarter of the relevant losses and she remembered that they received tax refunds in consequence.

76. In cross-examination, Jane said that the Auditors first started to act for the Brothers in the late 1980s and ceased to do so at the time of the death of James. ( 4TS13 ).

77. Jane did not see any source documents of any kind as to how the losses were arrived at. She said that each of John and James submitted returns ``pretty much on a year by year basis'' in the case of James and that James was somewhat more organised than John.

78. Jane said at 4TS15 that there was no audit of the affairs of John and James at the time when the mandate of the Auditors ceased. She agreed that it was routine at that time for returns to be assessed as returned and that that it was ``quite routine to experience the phenomenon of clients being subsequently audited and then amended assessments being issued or revision being undertaken of claims made in tax returns''.

79. Jane's evidence, as recorded at 4TS17 , indicates that for the Brothers, the Auditors were told by the Applicant what the bottom line loss was and then the loss would simply be divided by four for each of them. They did not ever see a partnership tax return. However, she agreed that it was necessary for a partnership to file a return ( 4TS21 ).

80. The Tribunal does not think that the evidence of Jane advances the matter to any material extent. Returns were apparently prepared for the Brothers, in which losses were claimed purely and only on the basis of information supplied by the Applicant. Jane accepted that there should have been partnership returns but that there were not.

Part F: the evidence of Mary.

81. Mary worked for the Applicant as his personal assistant from November 1987 to July 2000. Mary said that she thought that the partners in relation to Number were the Applicant, Bland and Hunt. She thought that the partners in Ripe were the Applicant, the Brothers and Stephen. As regards Pope and when asked who the shareholders were, she said. ``No I don't (sic). I didn't know that there were any but I don't know, I am sorry''.

82. Mary said that although all of this happened a long time ago, her impression was based on the fact that a relevant person might have referred to one of the others as ``my partner''.

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Part G: the evidence of Peter.

83. Peter has been a partner in the Auditors (Middle Market Advisory Division) since 1981. He said that the Auditors had precedent partnership agreements. He said in relation to the Applicant: ``I am sure I would have given him either a one-pager or maybe a more elaborate one...''.

84. Peter believed that his advice as to the appropriate structure was being sought by the Applicant, purely by way of confirmation of a decision already taken to use a partnership structure and that his assistance was confined to confirmation only and the provision of a suitable precedent.

85. Peter was asked at 4TS430 whether he found it surprising that there were no partnership returns. His answer was that ``in those days partnerships returns were not required''. He then went on to say that partnership returns only became necessary in 2000 when GST was introduced and having regard to the nature of the GST system. He said categorically that partnership returns were not required prior to the GST ( 4TS43 ).

86. In cross-examination, Peter agreed that as regards the partnerships' losses, he saw no source documents and that there were none in existence ( 4TS46 ).

87. Peter agreed that it was common for returns to be assessed as returned and said that he was not involved in any subsequent audit of the Brothers. 88. It was put to Peter that section 91 of ITAA requires a partnership return and that this has been the position since 1964. He was asked whether he was familiar with the section. Mr McGovern asked, ``You were not familiar with section 91 of the Act?'' and the answer was ``Well not to the depth that you are now reading it to me.''

89. Notwithstanding a number of further questions on the law, Peter adhered to his view that a partnership return was not necessary. He also said that it was perfectly proper to accept a statement from the Applicant as to the losses because the Applicant was a tax agent. Peter in fact became indignant at what he perceived as a reflection on his professional competence.

Section 91 of ITAA is set out in this decision as follows:

``INCOME TAX ASSESSMENT ACT 1936 - SECT 91

Liability of partnerships

A partnership shall furnish a return of the income of the partnership, but shall not be liable to pay tax thereon.''

90. Peter agreed that the relevant return assumed that the partnership kept proper books of account. He said also that proper books and records would include a suitable declaration of trust. Peter's evidence was that a partnership agreement need not refer to a nominee company acting on its behalf, since this could be covered by a suitable declaration of trust.

Part H: The evidence of the Applicant resumed.

91. At the time when the Applicant resumed his evidence, further documents had been produced by the Bank. In these circumstances, Mr Robinson was permitted to re-open his examination in chief.

92. Evidence was given by the Applicant as to a company which acted as nominee for a partnership involved in real property in which the Brothers and their other two brothers were the partners. Mr McGovern objected on the grounds of relevance and the documents were admitted subject to his objection. On reflection, his objection was perfectly correct and the documents in question are of no relevance. The manner in which another and entirely separate entity was structured cannot be relevant in relation to the merits issue.

Part I: the evidence of Michael.

93. At the beginning of the 5th day, Michael was interposed. He was an employee of the Auditors and responsible to Jane and Peter. In April 1993, he was seconded to assist the Applicant in order to help deal with some accumulated arrears.

94. In respect of Ripe and Pope, he prepared partnership returns for a number of years. (He did not recollect what precise years were involved; he also became confused about a subsequent period perhaps in 1997 when he again worked for the Applicant). The partnership returns were prepared from bank statements and cheque stubs but not by reference to any books of account such as ledgers and journals.

95. In cross-examination, Michael agreed that in his witness statement, he referred to draft returns; he did not know what was done with

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them. Michael agreed that the draft returns were prepared years after the Brothers had rendered their returns. He agreed also that he could have obtained access to their returns in order to check their returns against his calculation of losses, but did not do so. Michael agreed that it would not be possible to prepare individual partner returns except by reference to partnership returns.

96. Michael agreed that he saw no partnership agreements or source documents. He was clear that the draft partnership returns were prepared in April 1993. He thought that they were being prepared for a court case. (It will be remembered that the Applicant's returns for the first five relevant years were filed in August 1992).

97. Michael spoke of returning to work for the Applicant in 1997 but was not sure that the reference to that date in his witness statement was correct.

98. Michael was asked why if the Applicant's returns for most of the relevant years had been submitted in August 1992, he was being asked to prepare a partnership return thereafter. His answer was ``I don't know. I mean that's only a date.''

99. The Tribunal does not consider that Michael's evidence was helpful or relevant.

Part J: the conclusion of the Applicant's evidence.

100. The Applicant agreed that no partnership tax returns were ever prepared for Ripe and Pope. However, and in his own returns, he specified ``Sydney'' as the office at which partnership returns had been lodged. His answer was that ``It might be false in hindsight.''

101. This is a convenient point at which to note that as the transcript reveals, Mr Robinson raised many objections, sometimes on grounds of relevance, once by reference to the Evidence Act 1995 (and notwithstanding section 33 of the AAT Act) and on one occasion, on the basis that relevant documents should have been included in the T-Documents ( 5TS40, 41, 42, and 43 ). That last objection was correctly, after submissions by Mr McGovern, withdrawn.

102. The Applicant was cross-examined as to his defence to the proceedings instituted by the Bank pursuant to the guarantee. In his defence, the Applicant denied that he executed the guarantee and claimed Contract Review Act 1980 (NSW) relief on the basis that he was denied access to independent advice. His defence contains no reference to any alleged partnership. He said that he relied on legal advice.

103. The evidence of the Applicant was that Stephen had settled with the Bank (as apparently had James) but that John was still engaged in the litigation. Mr Robinson objected to questions as to the defences mounted by the other ``partners''. While I consider that the cross-examination was perfectly proper, it is not necessary or desirable for me to refer to the other defences, more particularly because of the omission of tabs 11 and 13 from Exhibit R9.

104. The Applicant was asked why Michael had been instructed to prepare draft partnership returns and whether they were for litigation rather than tax purposes. His answer was rambling and largely irrelevant.

105. In re-examination, the Applicant gave evidence as to a church function at which so he alleged members of Stephen's family were very rude to him. He also referred to allegations that he tricked others into signing the guarantee in favour of the Bank.

106. The Applicant gave evidence that his home was sold and that the proceeds were retained by the Bank on account of the amount owing to it. This meant that he had paid more than the others; however, he did not take proceedings against any of them for a contribution. No explanation was provided by him, as to why he did not seek contributions from the others.

107. There were during the hearing, references by the Applicant, to other cases and proceedings apart from the Bank action. Mention was made of a criminal case and of an enquiry. He said also that disciplinary proceedings resulted in his registration as a chartered accountant not being renewed. He claimed bitterly that he had been referred to as a ``grub''. I do not think that any of the other proceedings are relevant so far as I am concerned, except that I accept that in some cases, his ability to expect supporting evidence may have been limited (assuming of course that the persons involved could or would have been prepared to furnish evidence of this nature). I note also that Exhibit R9 was admitted on the basis that the contents of two tabs (tabs 11 and 13) were excluded ( 5TS102 ). I have noted though that the Applicant has been involved on

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a number of occasions in litigation and on occasion at the appeal level. His behaviour in this case indicates that he is at least persevering, even in difficult circumstances. An appeal in this matter is possible and it is for this reason in particular that I have thought it desirable to attach the submissions.

Part K: the Merits issue.

108. At the very best for the Applicant, he has utterly failed to discharge the onus on him. The Applicant has, in Annexure C, made a number of comments as to the reliability of witnesses called by him. In respect of some of those comments, I do not agree with his assessments of their evidence but, having regard to the nature of the evidence in question, I do not think it necessary for me to deal with them in detail. Peter, as to section 91 of ITAA, was clearly wrong. For the most part, the evidence in question was of little assistance or was against the Applicant (Lily) or irrelevant (Michael). I am not clear as to what purpose Michael's evidence was designed to serve. Other evidence was limited in value in that it was given in clear reliance on statements or information provided by the Applicant.

109. Having considered the evidence and the submissions of the parties, it is my view that the Applicant's case on the merits issue was always fatally flawed. If the Applicant had been entitled to claim alleged partnership losses, he would surely have put in returns in order to obtain tax refunds, which would have been useful as the financial position of Ripe and Pope became increasingly precarious. That his case on the merits issue is baseless is evidenced by the manner in which over many years, he has behaved in a manner consistent with a desire to delay this hearing. The partnership losses were claimed for the first time (in 1992) in returns submitted late and only after the ATO insisted on them being submitted. Thereafter, there were lengthy delays in consequence of section 264 proceedings and negotiations and including a position paper by the ATO to which the Applicant did not respond. (Mr. Robinson withdrew his allegation that the ATO had been dilatory). The Applicant's evidence as regards the section 264 conviction was particularly relevant. After the assessments were issued, the conduct of the Applicant was dilatory in the manner described by me previously, culminating in the dismissal and reinstatement to which I have referred. His conduct even after reinstatement was consistent; notices to produce were issued some 6 days before the hearing and his own witness statement was furnished on the 1st day. His summons against the ATO was in the circumstances cynical and improper. It seems clear to me that the Applicant could never have honestly believed that he had a case on the merits issue and that he was therefore concerned in the main with the penalty issue. I note in this context that I do draw an adverse inference from the fact that not one of the other (five) surviving ``partners'' was called to give evidence. Even on the basis that he was on arms-length terms in relation to Adams and Hunt and Stephen (although in the latter case, the argument appears to have been with members of Stephen's family), there was no such allegation as regards John or Bland. And in the case of all of them, it might perhaps have been in their interests to claim that they were partners; this is particularly so in the case of John and Stephen. In the case of James, his personal representative might perhaps have been prepared for the same reasons to assist. In each case and if there was a partnership, the relevant person could have been subpoenaed to answer on this aspect alone. I cannot say any more about Adams, since to do so might be adverse to the confidential nature of this decision.

110. However, the matter goes further than a mere failure to discharge the onus because it affects the penalty issue. Much of the Applicant's evidence was profoundly and demonstrably untruthful. How is it possible for a tax agent and manager in one of the leading accounting firms in this country to say (and repeat) that the circumstances were such that he was not obliged to furnish returns? And as to the relative pros and cons of various possible structures, the Applicant was surely in a position to know when losses flow through and when they remain locked in a relevant entity. Persons much less senior would be aware of these issues which are hardly matters of advanced tax law. Why was it necessary for him to consult Peter? And in any event, Peter's evidence (unsatisfactory as it was in certain respects) was that he was being asked for a precedent. As to the alleged partnership agreements, would he seriously have entrusted the task to someone who at that stage was his part-time secretary? Why were there never any TFNs for the alleged partnerships and why were

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there no returns? One aspect is of course of major significance. The documentation produced by the Bank was very large indeed. Not only does it not contain any partnership agreement or even a reference to a partnership agreement, but, and on the contrary, the Bank documentation points strongly (and indeed overwhelmingly so) to the fact that the Bank was dealing with and lending to companies and not partnerships. The answer has to be that there never were any partnerships and the Applicant knew that this was so. There was evidence before me that the Brothers claimed and received refunds; there was also evidence that they may have been obliged to return the refunds, although the evidence in this connection is sparse. The evidence before me as to the manner in which the Applicant dealt with the Bank indicates that he was dealing with companies and not partnerships. There are many other criticisms which could be levelled against the Applicant; it will however be clear that I rate his credibility as very low indeed. It follows of course, that I find as a matter of fact, that the Applicant in claiming the deductions was both reckless and indeed dishonest. This is of course relevant to the penalties issue.

111. I do not intend to deal in detail with either Annexure B or Annexure C. Annexure B refers to aspects of the evidence to which I may not have referred or to which I have referred with either less or more emphasis; that this is so should not be construed as in any way dismissive of any of those contentions. As regards Annexure C, I do not accept that Mr Johns should have been called by the Respondent or that it was necessary for the Respondent to do so. I also do not accept the Applicant's contention that Stephen or John should have been called by the Respondent; the onus was clearly on the Applicant to do so, and for the Applicant to contend otherwise is ludicrous. To describe the Applicant as a credible witness (and there is a contention to this effect in Annexure C) is quite simply ridiculous. The Applicant was in the hearing before me an untruthful witness; his attempt to take advantage of the losses was in my view, and on the evidence before me, an opportunistic attempt to gain an advantage to which he was not, and knew he was not entitled.

Part L: the Penalties issue.

112. Section 223 (1) of ITAA is set out in clause 95 of Annexure C which is included in the body of this decision as follows:

``95. Section 223 as it applied prior to 30 June 1992 was repealed in relation to statements after that date. In so far as is relevant, s. 223 provided:

  • (1) Where-
    • (a) a taxpayer-
      • (i) makes a statement to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, that is false or misleading in a material particular; or
      • (ii)...; and
    • (b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading, as the case may be, the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess.''

Section 227(3) of ITAA confers a general discretion on the Respondent to remit additional tax imposed under either of sections 222 and 223; section 222 of ITAA reads as follows:

``222(1) Where a taxpayer refuses or fails to furnish, when and as required under or pursuant to this Act or the regulations to do so, a return, or any information, relating to a year of income, being a return relating to or information relating to, or to the affairs of, the taxpayer, the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of tax payable by the taxpayer in respect of the year of income.

222(1A) If a taxpayer that is a relevant entity within the meaning of Division 1B of Part VI:

  • (a) fails to keep a record containing particulars of the basis of the calculation of its taxable income of a year of income and the tax payable in respect of that taxable income that were specified in a return in accordance with section 221AZD; or

    ATC 153

  • (b) refuses or fails to produce to the Commissioner, when and as required by the Commissioner under this Act, a document containing particulars of the basis of the calculation of its taxable income of a year of income and the tax payable in respect of that taxable income that were specified in return in accordance with section 221AZD;

the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of tax payable by the taxpayer in respect of that year of income.

...

222(2) Where, but for this sub-section, an amount of additional tax, being an amount less than $20, is payable by a taxpayer under this section in respect of an act or omission, then, by force of this subsection, the amount of the additional tax shall be taken to be $20.''

113. I refer next to clauses 65 to 72 (but excluding clause 71) of Annexure B, with all of which I agree, and which are included, as a matter of convenience, in the body of these reasons as follows:

``65. The Explanatory Memorandum to the Taxation Laws Amendment Act 1986 where reference is made to penalty provisions provides that:-

`By sub-section 170AA(1) a taxpayer will... be liable to pay interest on an increase in tax under an amended assessment. The amount (referred to as the ``principal amount'' in respect of which interest is payable is the amount by which the tax payable (emphasis added) under the amended assessment exceeds the tax payable under the assessment that was amended.

Tax payable means the gross amount of tax assessed in respect of the taxable income less rebates of certain tax credits such as those applicable to overseas tax paid. Credits for tax instalment deductions, prescribed payment system deductions or provisional tax are not deductible in ascertaining the amount of tax payable on which interest is to be charged'

(emphases added)

66. Paragraph 13 of the Explanatory Memorandum to the Taxation Laws Amendment Act (No. 2) 1995 which refers to tax payable in respect of late lodgement penalty provides:-

`Additional tax and interest are calculated on the lesser: the income tax payable on assessment; or a person's net tax payable.

The amount of income tax payable on assessment is the amount of tax payable on taxable income or, if in the case of trustees the amount of tax payable on net income, as defined in section 6(1). The tax payable is the amount after allowing any rebates or deductions under section 100(2) allowable to the person in making the assessment. Any crediting or applying of amounts under the various tax collection systems, or advance tax payments made by a taxpayer on account of income tax do not form part of the assessment process or are excluded from calculating the amount of income tax payable on assessment .'

(emphasis added)

67. Paragraph 11.32 of the Explanatory Memorandum defines what is net tax payable and refers to the fact that:-

`... tax payable does not include any credit available to the tax payer under the collection system or advance payments (paragraph 11.33 of the EM).'

68. Accordingly, the above Explanatory Memoranda clearly exclude collection credits (which include PAYE tax instalment deductions) from calculation of `tax properly payable'.

69. Section 6(1) ITAA 36 defines `assessment' to mean unless the contrary intention appears `(a) the ascertainment of the amount of taxable income and the tax payable thereon'. Section 166 ITAA 36 requires the Commissioner to make an assessment of the amount of taxable income and the tax payable thereon. There is an evident parallel between the definition of assessment in section 6(1) and the reference in section 166 to `an assessment of the amount of taxable income of any taxpayer, and of the tax payable thereon'.

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70. The reference to `tax payable' is a reference to an amount payable by the person to the Commonwealth under or by virtue of the ITAA36. Tax becomes due under ITAA 36 when it is assessed and a notice of assessment is issued.

72. In
Punin v DFC of T & Anor 2000 ATC 4288 at 4299 Emmett J considered the sales tax context and section 97 the penalty provision for making false statements. In considering section 97 which operates in the same way as section 223 and in particular the expression `'the tax properly payable by the person' Emmett J at 4299 paragraph 51 said:-

`... the word ``properly'' is used in the context of section 97(1)(a), which refers to a person making a false statement. Accordingly, the expression ``the tax properly payable'' must be construed as being the tax that would be payable if there had been no impropriety consisting of the false statement upon which the question is predicated.'''

114. My decision in
Creagh v FC of T 99 ATC 2193 was plainly incorrect. It was given in the small claims jurisdiction on a matter of jurisdiction only. As set out in Annexure B, I was not referred to the relevant Explanatory Memoranda detailed in Annexure B or to the decision of Emmett J in Punin's case, noting as I do that that decision is binding on me. The ``tax properly payable'' should correctly have been calculated before taking into account credits for payments made.

115. In respect of the additional tax imposed under section 223 of ITAA, I note in the first instance that the claims by the Applicant were false and misleading in that at all relevant times he knew that he was not entitled to and moreover could not establish the deductions claimed. His claims were both reckless and dishonest. Under section 223, the additional tax to be imposed is double the excess as defined, subject to remission in accordance with the discretion conferred by section 227(3) of ITAA. The Respondent has remitted the additional tax in such manner that it is 40% for all relevant years save the last and 50% for the last relevant year. I consider that I should take into account the fact that the Applicant's claims were not made in ``honest error'' as contended in clause 109 of Annexure C and also the fact that the Applicant's position as manager at the Auditors and as a tax agent made his conduct particularly reprehensible. On the other hand, I consider that I should also take into account the fact that, looking at the position in broad terms and overall, his PAYE payments did have the effect that he had in effect, substantially paid the primary tax for those years. Taking all of these factors into account, I consider that the tax under section 223 should be reduced to a uniform 30% for all of the relevant years. I might note that for the purposes of both this paragraph 115 and also paragraph 116 below, I considered certain rulings, and being both rulings which are not public binding rulings and also Taxation Ruling TR 92/10, a public binding ruling (since withdrawn) which in any event was expressed to apply, ``only to amendments made after 1 July 1992 to income tax returns for the 91-92 income year''. The rulings are in my view of very limited assistance and it is not to my mind surprising that they are not referred to in either of the submissions of the parties.

116. The additional tax assessed under section 222 of ITAA (as remitted) is, in my view, appropriate. There is no inconsistency in the fact that the rate for the 1990 year is lower than the rate for the 1988 year because there was no assessment for the 1989 year. In this context, the fact that a person in the position of the Applicant should have failed to render returns is particularly reprehensible. His returns were in fact submitted very late and only after the ATO audit commenced and the ATO obliged him to do so. His evidence as to the fact that he was not obliged to submit returns was altogether unacceptable. I do not accept the Applicant's contention, as set out in paragraph 110 of Annexure C, that I should treat the breaches of section 222 and 223 of ITAA as a ``single error''.

117. Excepting that the additional tax imposed under section 223 of ITAA for all of the relevant years is reduced to 30%, the objection decisions under review are affirmed.

[Annexure A, B and C omitted]


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