KIZQUART PTY LTD v FC of TMembers:
R Hunt SM
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
 AATA 582
R Hunt (Senior Member)
1. The Applicant, Kizquart Pty Ltd (Kizquart), objected to the imposition of penalties for late lodgement of returns and applied for review of the Respondent's decision in this respect. The Respondent considered the objection and refused to remit failure to lodge (FTL) penalties imposed for the late lodgement of a number of Business Activity Statements (BAS). Subsequently, the Respondent decided to remit seven of the penalties that were originally imposed, leaving six penalties outstanding. The Tribunal has decided that the penalty for the April 2004 period should be the only penalty imposed. The reasons are set out below.
2. Mr Henke is a director of the Applicant company, Kizquart, and appeared on behalf of the company at the Tribunal hearing on 21 April 2005. Kizquart is a service company set up to employ Mr Henke, a legal practitioner, and his wife, who works as his secretary. The company is registered for GST purposes and Mr Henke told the Tribunal that it is grouped with himself and his wife for GST purposes. Mr Henke told the Tribunal that he was aged in his 60s and had run a small legal practice since the 1970s. He purchased Kizquart as a shelf company in order to overcome administrative problems in the practice. He and his wife were the directors and shareholders. Kizquart paid them a salary and had no other employees. Mr Henke said he had thought the company structure would help him to manage the practice's tax liabilities better. His idea was that the company would pay him and his wife salaries like other employees and pay income tax monthly, rather than him having to find a lump sum at the end of each year to meet the annual tax assessments. Mr Henke said he had not had any previous tax problems and had paid all his tax apart from the FTL penalties in dispute.
3. Mr Henke said that one problem that arose from his operating through Kizquart was that the practice did not always earn the money that Kizquart paid out in salaries. His actual earnings from the practice sometimes fell behind his salary and tax liabilities. This shortfall in funds had sometimes caused him to furnish late BAS returns because Kizquart did not actually have the money that it declared in the returns. The money came in later. He had not anticipated this difficulty when the BAS system came in and he had thought he would have a choice as to how often he was required to lodge returns. Mr Henke said he had thought he must calculate and pay any GST due when he lodged his return but now understood that he need only lodge the return by the due date.
4. Mr Henke also told the Tribunal he had thought he could elect his accounting periods and had ticked a box electing to make quarterly returns. It was not until later he found out he was required to make monthly returns. He had put in quarterly returns for some time before he started receiving letters from the Respondent along with monthly return forms. He did not understand why he was receiving these forms and letters and had thought the Australian Taxation Office (the ATO) had sent them in error. He continued to make quarterly returns. He could not recall exactly when he contacted the ATO and learned that he should report monthly. He complained that he had never received a letter from the ATO explaining why he should furnish monthly returns and had to make his own enquiries.
5. Mr Henke admitted that ideally he should have made enquiries sooner. He felt under siege at the time from the pressure of work during the
ATC 2200property boom and cut-price conveyancing adding to his work load but not increasing his earnings. He said that he was ``run ragged'' by his practice and put his clients interests ahead of his own. He had since put up his fees but during the period when he was late in lodging his BAS returns, he had delayed some returns until he had the funds to make payments. Mr Henke said that he and his wife were struggling to cope for many reasons. They were devastated by the suicide of one of their sons and the subsequent diagnosis of their other son with serious mental problems. Mr Henke said he knew he should have attended to the returns but was overcome and going through a very difficult period. The family continued to suffer although some of these events occurred before the recurring failure to lodge on time. Mr Henke also said he suffered from diabetes and he furnished the Tribunal with a medical certificate from Dr Stephen Twigg, dated 18 February 2005, as evidence. He told the Tribunal this made him tire more easily and contributed to his delay in lodging his statements.
6. Mr Henke further told the Tribunal he was confused about whether he should be classed as a small taxpayer or a medium taxpayer and how this affected his reporting obligations. He thought that, as he earned business receipts of less than $1m per year, he was classed as a small entity. He understood that a business earning between $1m and $20m was a medium entity. He complained that this information was not on the papers sent to him by the ATO and that his understanding led him to assume that he was a small entity as he earned less than $250,000. Eventually, he learned from a conversation with an ATO officer that he was a medium entity because of an alternative test. He said he now realized his business was a medium entity because the PAYE instalments were $25,900 annually and the cut-off for a small entity was $25,000. This resulted in steeper administrative penalties than would have been appropriate for a small entity. If he had been aware of this distinction, he would have taken care to have salary payments reflect his actual financial position. Through ignorance, he had taken the company into the medium entity category, although he had insufficient cash flow to meet the turnover he ascribed to the company.
7. Mr Henke said he had always used an accountant to do his income tax returns but had decided to do the BAS returns himself. This was because the publicity that accompanied the introduction of the GST and the BAS system had suggested the system would be simple to understand. However, although he now understands what he must do, initially he found the system and the return forms very difficult. This was another reason for his failing to lodge all the returns for Kizquart on time.
8. Mr Henke told the Tribunal that the Respondent had sent some reminders and letters to the wrong address. He said he had rung the Respondent and asked for forms to be sent to him when he had not received them. Before the Tribunal was a printout of a note on the Respondent's computer system verifying this. Mr Henke gave oral evidence that he had changed his practice address about 8 to 10 years after he set up his practice in 1971, again about nine years later and again in January 2004. The Respondent also provided to the Tribunal an address history for Kizquart gleaned from a search of the records of the Australian Securities and Investment Commission. This showed several changes of address including more than one address at Balmain and post office box addresses at Baulkham Hills and at North Parramatta. As a result of the changes of address, Mr Henke did not receive the forms. He also described an error made by the post office because they only recognised Mr and Mrs Henke at the address given and not the company name of Kizquart. As well, Mr Henke explained that forms had also been sent to his accountant, although he had not instructed his accountant to do the BAS returns.
9. Mr Henke told the Tribunal that the current format for the BAS is much simpler as he no longer has to calculate his liabilities and just has to tick a box where the Commissioner has calculated the amount. The current format for the BAS commenced on 30 June 2001 from information provided by Ms Su, the representative for the Respondent, after the hearing. Mr Henke said he has not lodged late returns since he understood how to prepare the statements. Mr Henke also told the Tribunal that, apart from the late BAS returns that gave rise to the penalties, he had an excellent tax record. Under questioning, Mr Henke denied that he had made a conscious decision not to furnish the returns on time. He told the Tribunal
ATC 2201that he was doing his best in difficult circumstances. Kizquart had paid its taxes and failed only to lodge returns on time for the period when Mr Henke was having difficulties. The imposition of the penalties was an additional burden on him when he was already in some financial difficulty and in poor health.
10. The documents before the Tribunal show Kizquart objected to the Commissioner's decision to impose FTL penalties for late lodgement of the BAS returns for one reporting period in 2002, seven reporting periods in 2003 and five reporting periods in 2004. By the time of the Tribunal hearing, the Respondent had agreed to remit penalties in full for four of the seven periods in 2003 and three of the five periods in 2004. Ms Su told the Tribunal that it was intended that the penalties for the six months prior to 16 September 2003 be remitted as this reflected the period when Kizquart was not receiving the forms. Due to an oversight, different periods were remitted. Ms Su said that this actually resulted in more fines being remitted than Kizquart was entitled to, however, the Respondent would nevertheless not pursue the penalties it had previously indicated it would remit.
11. The issue before the Tribunal was whether the administrative penalties imposed by the Respondent, pursuant to Division 286 of Schedule 1 to the Taxation Administration Act 1953 (the Administration Act), in respect of the two reporting periods in 2002, two remaining reporting periods in 2003 and one remaining reporting period in 2004 should be remitted.
The Administration Act
12. Subsection 286-75(1) of Schedule 1 of the Administration Act, provides that the taxpayer is liable to an administrative penalty if required to give a return, notice, statement or other document to the Commissioner by a particular day and fail to do so.
13. Section 16-150 of Schedule 1 of the Administration Act states that an entity that must pay an amount under Division 12 must notify the Commissioner of the amount on or before the day on which the amount is due to be paid, even if it is a nil amount. The notification must occur regardless of whether a payment is necessary or whether the payment is made. This notification must be in the approved form and lodged with the Commissioner.
14. Subsection 286-75(1) provides for penalties where a taxpayer fails to lodge a return by a particular day. The Commissioner has power under subsection 298-20 of Schedule 1 to remit penalties in appropriate circumstances. The Commissioner's decision may be reviewed by this Tribunal, but the decision must stand under section 14ZZK unless the taxpayer can establish the assessment was excessive or that the decision should have been made differently. See subsection 14ZZK (b) paragraphs (i) and (iii).
The GST Act
15. Section 31-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) states that, if an entity is registered or required to be registered, it must give to the Commissioner a GST return for each tax period, whether or not the entity's net amount for the tax period is zero, or it is liable for GST on any taxable supplies that are attributable to the tax period.
16. Section 195-1 of the GST Act defines a GST return as a return that complies with section 388-75 in Schedule 1 to the Administration Act, among other matters. Section 195-1 of the GST Act also defines what the ``approved form'' is by reference to section 388-50 of Schedule 1 to the Administration Act, which outlines what is in the ``approved form''.
17. Entities for GST purposes must lodge GST returns via their BAS returns for specific periods. There are 3 different accounting periods that may apply. Some entities report annually, others quarterly and the remainder monthly.
18. Mr Henke has impressed the Tribunal as a person who has tried to meet his tax obligations. The uncontradicted evidence he put to the Tribunal was that he had always paid his taxes and failed to lodge the new system of BAS returns initially due to non-receipt of the forms and also due to personal problems. It is plain to the Tribunal that this was why Kizquart did not receive the forms for an extended period of time. It is apparent that there were several changes of address and problems with receipt of the forms and the Respondent has conceded that Mr Henke was not receiving the forms until after 16 September 2003. I also accept Mr
ATC 2202Henke's evidence that he was distracted by financial difficulties, the pressure of work and tragic family problems during the period when he fell behind with the BAS returns. Mr Henke concedes he received reminders from the Respondent but as he thought they were sent in error, he did not attend to them.
19. Mr Henke has not disputed that Kizquart is required to be registered for GST and must lodge BAS returns. While confused about the appropriate return dates initially, he now lodges monthly returns and has not argued that he should be permitted to lodge quarterly. There is no dispute that Kizquart failed to lodge certain BAS returns, over a period from 2002 to 2004, by their due dates. The Respondent has agreed to remit the penalties for seven of these returns but has not conceded that the remaining six penalties should be remitted. The evidence of Mr Henke was that any amounts due had been paid, except for the penalties.
20. As pointed out in the submissions of Ms Su, the penalty is an administrative penalty which is imposed by operation of law. The Commissioner has discretion to remit all or part of the penalty imposed. Although the penalty imposed is described as an ``administrative penalty'', I have noted that previous Tribunals have taken into account normal sentencing principles when exercising the discretion whether to mitigate the penalty or not. In
William Vazquez & Associates v FC of T 2005 ATC 2087;  AATA 301, Senior Member Allen observed that apart from circumstances peculiar to the individual offending taxpayer, the threefold purposes of punishment must be kept in mind. Those purposes are retribution, deterrence and reformation as discussed in
R v Kane  VR 759 at 764-765. In my opinion, Mr Henke, as the mind behind Kizquart has reformed his practice, it is not necessary to punish him for his inadvertent failure in view of his difficulties during the period in question.
21. Kizquart is a private company with the only directors and shareholders being Mr Henke and his wife. It is a service company and pays the salaries of Mr Henke and his wife in their capacities as a sole practitioner operating a legal practice and secretary respectively. As Mr Henke pointed out in his evidence, at times the company has cash flow problems due to the nature of the business. The company is dependent on the practice for its revenue and Mr Henke's business fluctuates.
22. Mr Henke told the Tribunal that he had been in practice since 1971 and his main business was conveyancing. Mr Henke is not an expert tax practitioner and uses an accountant to prepare his income tax returns. During the period when he fell behind in furnishing the returns, there was a property boom and he and his wife were finding it difficult to cope with all their responsibilities. Unfortunately, the boom did not result in particularly increased earnings as it was common to reduce costs in order to attract business. The boom had the adverse affect of giving Mr Henke even less time to attend to his personal responsibilities as his energies were stretched to look after his clients' interests.
23. At the time the BAS returns were due, the company was having cash flow problems and was unable to make payment of the tax obligations calculated in each BAS return. Mr Henke gave evidence that it was then the belief of the officers of the company (himself and his wife) that the tax due had to be paid at the time of lodgement of the BAS. This is not correct but I do not doubt the evidence of Mr Henke that on previous occasions the company had paid the calculated tax due at the time of lodgement of the BAS. In addition, he was sometimes unable to calculate what was due and this delayed lodgement of the returns. Foolishly, neither he nor his wife, when having difficulty in making payments and completing the returns, initially contacted the ATO in order to make some arrangements regarding repayment. If they had done so, they doubtless would have been informed that payment did not have to be made at the same time as lodgement of the BAS. The Respondent wrote a letter to Kizquart, dated 18 June 2004, reminding the company that the BAS for the April 2004 period was due. I note in passing that this might be seen to confirm a belief that payment was due at the time of lodgement of the BAS.
24. Principles to be applied in deciding whether to remit a penalty are set out in the ATO Receivables Policy document. In line with previous decisions of this Tribunal, I have endeavoured to apply that policy so far as is consistent with the Tribunal's duty to make the best or preferable decision in the particular case. See
Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634
ATC 2203where Brennan J (as he then was) stated at 645 that ``consistency is not preferable to justice''.
25. Paragraph 98.5.3 of the Receivables Policy document sets out that the Commissioner will have regard to the lodgement history of the taxpayer and the effort taken by the Tax Office to obtain lodgement. The Policy document continues at paragraph 98.5.18:
``Generally, remission of FTL penalty will only be granted where the delay in lodgement occurred due to circumstances beyond the control of the taxpayer and where it would be fair and reasonable for the Commissioner to remit part or all of the penalty applied...''
On the other hand, paragraph 98.5.21 states:
``In certain circumstances, it may be appropriate for the Commissioner to consider a partial remission of the FTL penalty applied. In these cases the Commissioner will consider issues such as the length of time the document was overdue, the taxpayer's circumstances, the taxpayer's lodgement history and any contact with the Tax Office prior to the due date of the documents.''
26. These expositions of policy accord with general principles regarding mitigation of penalty. I also note that, notwithstanding the comments in
Re Kowadlo and Anor and Commissioner of Taxation  AATA 786, there has not been any actual loss or realistically any potential loss of revenue which might affect a decision whether to remit penalty. Mr Henke has explained that his late lodgements were caused by a combination of his failure to understand the new tax system, pressure of work and personal difficulties. I think it is fair to say that these factors amount to a delay caused by circumstances beyond the control of the taxpayer. In addition, Kizquart and Mr Henke otherwise have a good tax record and did contact the ATO once Mr Henke realized he had not understood his obligations.
27. I accept that Kizquart, through its directors, was under a mistaken belief that payment had to accompany lodgement. There is some mitigation in that Mr Henke, in his capacity as director, made some attempt to contact the ATO and explain Kizquart's difficulties and sought some arrangement after several failures to lodge on time. A further mitigating factor is the mistaken belief by Mr Henke that he had correctly elected to lodge returns quarterly, although this mistake also might have been corrected sooner had the directors made earlier enquiries. Further, even when reminder letters were sent and finally reached the correct address, the directors of the company assumed a mistake on the part of the ATO and delayed checking that this was so.
28. Importantly, however, there is no evidence before me of prior or subsequent breaches. The company is subject to fluctuations in its income but there is no suggestion it cannot meet its commitments. Nevertheless, Mr Henke has told the Tribunal that the penalty will be felt severely by him and the company and is excessive when the size of the business is taken into account. It is a medium entity only because of a few hundred dollars and a lack of awareness of the need to bear in mind the turnover of the company for its GST classification. This is not to say that a dishonest approach should be taken to avoid tax but, as the entity was merely to assist administration and assist payment of tax in an orderly fashion, it would have been in order for the directors to regulate funds with the threshold in mind. The penalty is a large amount for the directors to pay with their reduced business earnings and reduced ability to cope in the face of health problems and family difficulties. As Kizquart has not been accused of making any errors since April 2004, I accept Mr Henke's evidence that he will ensure that future returns will be furnished on time.
29. So far as retribution and general deterrence are concerned, I have no doubt that Kizquart and its accountants and directors are now well aware of the late lodgement provisions and will endeavour to meet this requirement. Kizquart is a small family company and although its default was clearly within the provision of the Act, and the Commissioner has since the objection decision decided to remit some of the penalty, I am persuaded that the remaining penalty is excessive. In addition, I find that the director's mistakes in 2002 and early in 2003 were more excusable than in the later periods when it was more reasonable to expect that they had come to terms with the requirements of the new tax system. However, it is the penalties incurred in late 2003 and three of the five in 2004 which the Commissioner has decided not to pursue.
ATC 2204By my calculation, the remaining penalties for the six periods still sought by the Commissioner total $4,620. In my view, the penalty for the last return lodged out of time in 2004 is the least excusable. I find that Kizquart's default can properly be remedied by the imposition of a total penalty for the outstanding April 2004 default. This means that the sum of $440.00, for the failure to lodge a return on the due day in April 2004, should be the only penalty imposed.
30. The decision under review is set aside and the Tribunal remits this matter to the Respondent with the direction that the penalties imposed upon the Applicant, pursuant to subdivision 286-C of Schedule 1 to the Taxation Administration Act 1953, are remitted apart from the penalty of $440 imposed in respect of the late return for April 2004.