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DG EMPIRE (AS TRUSTEE FOR DG EMPIRE TRUST) v FC of T

Members:
GD Walker DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2007] AATA 1485

Decision date: 29 July 2007

Professor GD Walker (Deputy President)

Summary

1. The applicant applied for a review of a decision by the respondent refusing to exercise his discretion to remit all or part of a tax shortfall penalty imposed on the applicant for failure to take reasonable care to comply with a taxation law.

2. At the hearing, the applicant was represented by Mr Ian Young of counsel, and the respondent by Ms Wei Li Su of the Australian Taxation Office. The documents before the tribunal comprised the documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (the T documents), taken into evidence as Exhibit R1, together with the other documents tendered by the parties at the hearing. The applicant gave oral evidence in person.

Basic facts

3. The applicant was formed in 2004 as a family trust for the purpose of purchasing a commercial property at Cowper Street, Warrawong, New South Wales. A contract for the sale of the property for the sum of $2,280,000 was entered into on 30 November 2004 (T pp33-34) and the transaction was settled on 23 March 2005 (T p35). In the contract for sale the box indicating whether the sale was a taxable supply was not completed, and the box indicating whether the sale was the supply of a going concern pursuant to ss 38-325 and 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) was marked "Yes" (T p34).

4. The applicant was registered for GST purposes on 1 October 2004. It lodges its business activity statements (BAS) quarterly and accounts for GST on a cash basis.

5. The applicant's BAS for the period 1 January 2005 to 31 March 2005 was due on 28 April 2005, but the time for lodgement was extended to 26 May 2005. The BAS was not in fact lodged until 31 May 2005 (T pp28-29). In it, the applicant claimed an input tax credit of $207,769.

6. Pursuant to a review of that BAS, an officer of the respondent contacted Mr Murray Reid, who was noted in the respondent's records as the applicant's representative. Mr Reid said he no longer represented the applicant and referred the respondent to Mr George Rafaletos (incorrectly spelt as "Rafalegos" in most of the documents), a director of the applicant. On being contacted by the respondent, Mr Rafaletos answered some questions before referring the caller to his tax agent, Mr Bill Hunt (T p67).

7. The respondent contacted Mr Hunt on 3 June 2005 (T p67). The respondent states that in the course of that call, Mr Hunt was offered the opportunity to make voluntary disclosure (T p62), but the applicant contests that. At all events, no voluntary disclosure appears to have been made. Mr Hunt was asked to supply a settlement statement, tax invoice and the first two pages of the contract for sale of the property. Mr Hunt said he did not hold those documents and referred the respondent to one of the directors of the applicant, Ms Daniela Capocchiano, who he described as Mr Rafaletos's fiancée (Mr Rafaletos says Ms Capocchiano is his girlfriend, not his fiancée).

8. The respondent contacted Ms Capocchiano on 8 June 2005 to ask her for the settlement statement, tax invoice and the first two pages of the contract (T p67). Ms Capocchiano faxed to the respondent the settlement statement and the first two pages of the contract, but no tax invoice (T p32).

9. The following day the respondent again called Ms Capocchiano requesting a tax invoice, and pointing out that the contract shows the "Yes" box ticked against the question about whether the contract was for the supply of a going concern. Ms Capocchiano said that the purchase was a commercial

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property comprising a shop and offices. The ATO officer told her that if the box was ticked incorrectly, something in writing from the solicitor confirming that would be needed (T p67).

10. According to the respondent's activity log, on 21 June 2005 Ms Capocchiano left a message saying that the applicants had been "scammed", as they had been told they could use the GST claim to "fix up" the commercial property (T p67).

11. The respondent telephoned Mr Hunt on 7 July 2005 requesting an explanation for the GST credit claim for the sale of a going concern. The activity log records the following questions and answers (T pp68-69):


"…  
07 Jul 05 Phone call - Tax agent Bill Hunt 0293997899
12:04pm I asked for an explanation for the GST credit claimed for the sale of a going concern. I asked questions to assist in determining behaviours for penalties assessment and recorded answers as follows:-
  • Who recorded the transaction on client records?
    I did.
  • What information did your client provide to you?
    The client told me that their solicitor had told them that there was GST credit claimable on the purchase of the business.
  • What documents did you sight?
    Settlement statement only.
  I said that the settlement statement is a legal document and that other documents are required to satisfy GST legislation.
  • Did you ask to see the contract?
    Client told me it was unavailable, as the solicitor held it.
  • Did you sight the tax invoice to show that GST had been charged?
    No, I acted as I had been told by other accountants in Wollongong.
  I said that as a tax professional he had an obligation to ensure the claim was correct by referring to relevant documents and not relying on what he had been told.
  • Do you believe that claiming GST credit for a transaction over $2 million without sighting relevant documents is reasonable?
    I am 72 years old and might as well retire if I am to be penalised for a simple mistake. We deal with very few transactions like these.
  I said that there are ATO websites available and other sources within the ATO to seek advice.
  I advised I would be recommending a 25% penalty for lack of reasonable care, subject to approval.
  I told him that a formal letter would be sent with our decision and would include advice on the right to object to the decision
  ..."

12. Following the review, the respondent amended the applicant's BAS for the relevant quarter to disallow the input tax credit of $207,769 that had been claimed (T pp36-37) and issued an assessment rejecting the input tax credit claim and imposing an administrative penalty of $51,942.25 pursuant to s 284-75(1) of Schedule 1 to the Tax Administration Act 1953 (TAA1953), being 25 percent of the tax shortfall amount, on the ground of failure to take reasonable care to comply with a taxation law for the relevant quarter (T pp43-44). The assessment was dated 27 July 2005.

13. By letter dated 1 September 2005, the applicant conceded the disallowance of the credit claim but objected to the penalty on the grounds that the purchase of the property was the first they had made and they were unaware of the meaning of "going concern", that until contacted by the ATO they did not realise they had signed the contract as one for a going concern, they honestly believed that GST was included in the purchase price and they relied on the opinion of their tax agent, who had made an honest mistake (T pp45-46).

14. The Commissioner disallowed that objection on 23 November 2005 (T pp50-51) and on 19 January 2006, the applicant applied to this tribunal for review of that decision (T pp3-5).

Issues

15. At the hearing Mr Young very properly conceded that the BAS incorrectly stated that the sale was of a going concern and claimed the corresponding GST credit. He also conceded that the applicant had a tax agent at the time and relied on his advice, that the BAS was false or misleading in a material particular and that a

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penalty of 25 percent of the shortfall amount was proper.

16. The only issue remaining, therefore, was whether the Commissioner's discretion under s 298-20 of Schedule 1 to the TAA1953 should be exercised to remit all or a part of the administrative penalty.

Evidence at the hearing

17. The respondent relied on s 14ZZK of the TAA1953 to put the applicant to proof of the facts, other than admitted facts, on which the applicant relied in order to prove that the assessment under review was excessive.

18. The s 37 documents (the T documents), which had been filed and served in three instalments, were admitted as Exhibit R1.

19. In her oral and written (Exhibit A2) evidence, Ms Capocchiano stated that the purchase of the Warrawong property was the first time the applicant had ever purchased a commercial property. To the best of her knowledge, the trust did not seek tax advice before the purchase.

20. Some time after settlement and after the BAS was lodged, Mr Rafaletos telephoned to tell her that the ATO wanted some information. On the same day or very shortly afterwards, an ATO officer telephoned and asked her what she had purchased. She told the officer that it was a commercial property. The respondent's officer then asked, "What business did you buy?", to which she replied, "I didn't buy a business, I bought a commercial property".

21. The ATO officer asked her for a picture of the property, which Ms Capocchiano faxed together with a copy of the front page of the contract and the settlement statement.

22. The ATO officer telephoned later to point out that Ms Capocchiano had not sent a tax invoice. She told the officer that she did not have one and that she had sent everything that she had sent to the accountant. As the officer had stressed that a tax invoice was required, she telephoned the vendor's agent and said, "The ATO has asked me for a tax invoice. Can you provide me with one?". The real estate agent replied, "You have been wiped off our system. I can't help you". The solicitor who had handled the transaction was away on holidays, but she left a message for him to call her.

23. Ms Capocchiano then called the ATO officer and gave her the agent's and the solicitor's telephone numbers, adding that she had not been able to obtain a tax invoice. On being told that to claim GST she needed a tax invoice, she replied, "I really don't know anything about tax stuff, that is why I have an accountant".

24. She could recall the ATO officer mentioning penalties, but she did not understand how the system worked and, never having had any tax problems previously, did not fully understand what was being said. She stated that the officer did not tell her that there was a problem with the BAS until after she had provided her with all the information requested. Her understanding had been that the ATO was merely verifying the information. Ms Capocchiano stated that she was never offered a voluntary disclosure. She did not know what that meant and would have asked what it meant if it had been offered to her.

25. In cross-examination she said she did not deal with the applicant's accounts and did not know whether previous BASs had been late. She was "just a name in the company" and had confidence in the tax agent, to whom she had supplied all the documents he requested. She knew that the applicant had claimed an input tax credit exceeding $200,000, but as this was their first big property purchase, she did not understand how GST worked and had simply given the accountant all the documents he had asked for. She had never as such realised that an input tax credit could not be claimed, but simply recalled receiving a letter in the mail stating that they had to pay a penalty. She did not know what were the entitlements and credits under GST and had just said "Bill, do this". She left it all up to him and did not know there was a problem, even after speaking to the ATO officer. She thought it was just some kind of procedure that had to be gone through. She recalled having told the officer that the real estate agent and the solicitor had "scammed" them because they did not do the right thing, and had overcharged, but did not recall saying that they had assured her that an input tax credit could be claimed, which could then be used to refurbish the property.

26. In relation to the telephone conversations on 21 June 2005 (T p67), she said that she had

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been "stressing" because the solicitor was either away or unwilling to take their telephone calls. In relation to clause 13 of the contract, Ms Capocchiano said she had asked the officer what it meant but was nervous about it because the officer was "very stern" with her. She could not recall ever telling the officer that she understood that the applicant was not entitled to the input tax credit.

27. Mr Rafaletos also stated (Exhibit A3) that Warrawong was the trust's first commercial property purchase, and that tax advice had not been sought beforehand. He did, however, inform his tax agent about two weeks after settlement. Mr Rafaletos said he gave Mr Hunt the "paperwork" including invoices relating to payments made by the trust that included GST. About a week later Mr Hunt contacted him and said, "George, you are able to claim GST on the building. It is a commercial property and you can claim GST on it". At Mr Hunt's request, he arranged for Ms Capocchiano to fax to him all the documents that he thought were necessary for the GST credit claim, including the settlement figures and the first page of the contract.

28. About three weeks later, Mr Hunt telephoned to ask him to come in and sign the form for GST, which he did.

29. A week or two later he received a call from an ATO officer who asked him for some information relating to GST. He replied, "Look, I am not aware of what has been claimed, you need to speak to my accountant, Bill Hunt", and gave her Mr Hunt's contact number. He explained that he had bought a commercial building with four shops downstairs and commercial units upstairs. Asked how much he had paid for it and whether it was a going concern, he replied, "I don't know where you are coming from. I don't understand. What is a going concern? I think it will be best if you ring Bill". During the conversation the ATO officer did not tell him that there was any dispute about the claim, and he gathered that it was simply routine checking. The officer did not offer him a "voluntary disclosure", and he had no idea what that phrase means.

30. After receiving the penalty notice he phoned Mr Hunt, who said to him, "Don't worry about it. It is just someone in the ATO office who is new and trying to score points. The ATO office works on commissions. I will send them a letter and tell them what has happened and they will pardon me".

31. "Whatever you can do, can you do it?", Mr Rafaletos then asked. "I really can't afford this bill". He said he had never expected to be able to claim GST on the property, it was not something that had occurred to him at all. It was only brought to his attention by Mr Hunt, on whose advice he relied.

32. Not long after the penalty notice was issued, Mr Rafaletos spoke to an ATO officer, the same one as he had originally spoken to. She said, "I feel really sorry. I understand that it was not your fault and it was really the accountant's fault and that you relied on the accountant. However, I have to go through the processes. You should write a letter of objection". He duly arranged for a letter of objection to be sent.

33. In cross-examination Mr Rafaletos stressed that he was "just a worker", a refrigeration mechanic, and knew nothing about tax matters. He did not know when the BAS was lodged or whether it was late, or whether other BASs had been late, incurring late lodgement fines. He had not realised that they were not entitled to an input tax credit until "a lady phoned", whereupon he had referred her to Mr Hunt, saying he knew nothing about it. It was Ms Capocchiano's father who had drawn the Warrawong property to the applicant's attention as a possible family investment.

34. He was unaware whether the applicant had a good compliance history or whether any of the late lodgement penalties remained unpaid, or whether the applicant was entitled to an input tax credit. He had given Mr Hunt all the documents and did not know what he had claimed. Mr Hunt had been his father's accountant for 30 years, although he did not know if he was still working for his father. Mr Rafaletos said there are two directors, himself and Ms Capocchiano, who also pays the bills and takes care of correspondence. His father is not a director, and in that sense is not involved, but he tells the directors what to do and they do it.

35. Before the hearing the respondent had filed and served an affidavit sworn 27 February 2007 by Hania Geras, an officer in the

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compliance verification centre (CVC) for GST at the ATO Hurstville office. At the start of the hearing the respondent withdrew the affidavit, on the ground that the official script of questions referred to in it could not be found and it had become apparent that the deponent had in fact memorised the questions instead.

36. At the resumed hearing the applicant tendered particular parts of that affidavit in support of its own case, relying on
Re Vassis:
ex parte Leung (1986) 9 FCR 518 at 520. The relevant parts were admitted into evidence as Exhibit A9. In them the deponent stated that it was her practice in relation to contact with a taxpayer or a taxpayer's representative to read from a script, so as to ensure that she raised all matters with the taxpayer. At the same time or shortly afterwards she records the taxpayer responses in the compliance verification case report, also noting any doubts or hesitation the taxpayer or the representative expresses.

37. On 2 June 2005 she downloaded the case from the ATO automated work allocation (AWA) database. She could not recall exact conversations or client contact that occurred in the course of the CVC review in question. She then went on to depose as follows:

"…

  • 8. On or about 3 June 2005, I had a telephone conversation with Bill Hunt. During that conversation, I discussed with Mr Hunt the Applicant's activity statement for the period ending 31 March 2005. During that conversation, I offered Mr Hunt the opportunity to make a voluntary disclosure. In accordance with my normal practice, I said words to the effect of: 'Please review the records used to prepare the activity statement for the period ending 31 March 2005 and advise me as soon as possible of any errors or omissions. If revisions are made to the activity statement as a result of such a voluntary disclosure, remission of penalties may be possible. However, if a revision of the activity statement is made in the Australian Taxation Office's favour as a result of the Australian Taxation Office's enquiries, remission of penalties may no longer be possible.'
  • 9. The CVC Report has an entry under the heading 'Outcome of Voluntary Disclosure' stating 'Was voluntary disclosure offered? Yes/No'. On or about 3 June 2005, I wrote in response: 'Yes, to Bill Hunt, accountant 03 Jun 05 01:00pm'.

…"

38. The applicant's tax agent, William R Hunt, attended the resumed hearing in response to a summons to give evidence issued at the instance of the respondent. Mr Hunt had on 30 April 2007 sworn an affidavit (Exhibit A10) in which he referred inter alia to paragraph 8 of Ms Geras's affidavit. In relation to that paragraph he stated:

"I do not recall any mention of voluntary disclosure as alleged during the course of that conversation. Had penalties, together with remission of those penalties, been mentioned I believe I would have clarified the situation with Hania Geras and advised my client accordingly."

39. In cross-examination Mr Hunt said he has been a tax agent for over 40 years and is still working. He has completed over 50 BASs in the last six years and has been tax agent for the applicant since about December 2005. He is still the applicant's agent. He prepared and lodged the BAS in question, using the first page of the contract of sale and the solicitor's settlement statement. He had in fact asked the solicitor for a copy of the whole contract but had not received it. He remembered discussing the matter with George Rafaletos but could not recall if Daniela Capocchiano had been involved. He had asked George to sign the BAS before it was lodged but could not recall if he read it, and did not think he had asked any questions about it. Neither he nor Ms Capocchiano had expressed any doubts about it. He himself had thought the applicant was entitled to an input tax credit until he had been contacted by the ATO, whereupon his view had changed.

40. The Warrawong purchase had been the first property transaction he had handled in relation to GST. He had not telephoned the ATO or made any other enquiries about how to complete the BAS in that situation, nor had he conducted any research by consulting the legislation or the ATO website. He had not known that an ITC claim required a tax invoice and had not asked to see one.

41. 

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Mr Hunt admitted writing the letter of 1 September 2005 to the ATO (T p46) in which he had stated that he had formed the view that the contract was not signed as a going concern because the trustees honestly believed that GST was included in the purchase price. (In fact the sale was declared to be for a going concern but the taxable supply box had not been completed.) The letter further stated that it was the first time he had been asked to advise on GST on a property and now realised that he had made an honest mistake by not asking the trustees to show him a copy of the contract.

42. He reiterated that he did not recall Ms Geras ever raising the subject of voluntary disclosure and agreed that if she had, "bells would have gone off" in his mind and he would have taken appropriate action.

Applicant's submissions

43. The applicant submitted that total or partial remission of the penalty was warranted, first, because the applicant had co-operated with the ATO's review in a reasonably timely manner. The applicant's directors and tax agent had not sought to hide anything. That constituted mitigating conduct that deserved a further remission.

44. Secondly, the applicant had never been given the opportunity of making a voluntary disclosure. Alternatively, if it had been given such an opportunity, it was given no reasonable opportunity to make such a disclosure, no real chance to obtain legal or other expert advice.

45. Mr Hunt had been an honest witness who stated that he could not recall any offer of voluntary disclosure, and if such an offer had been made, "bells would have gone off" and he would have taken appropriate action.

46. ATO Practice Statement Law Administration (PSLA) 2004/5, which was in force at the time of the audit and of the objection, gave the Commissioner a discretion to treat a disclosure made after an audit commences as having been made before the taxpayer was told of the commencement of the audit if the taxpayer makes a voluntary disclosure before the formal date of commencement of the audit. It states that "The Tax Office will generally notify a taxpayer about a compliance activity and give a date for the commencement of the audit. Notification will normally be in writing or may be made orally" (para 37). That passage should be read with the implication that an audit would not commence unless the taxpayer had been given a reasonable period of notice. This had not happened in this case as the audit had commenced almost immediately after the first contact between the ATO officer and the applicant.

47. Further, the respondent had put forward three different and inconsistent versions of the conversation in question. The activity log recorded it as taking place at 3:51 pm on 3 June 2005, but made no reference to an offer of voluntary disclosure (T p67). The CVC report, however, stated that voluntary disclosure had been offered to Mr Hunt at 4:00 pm on 3 June 2005 (T p62). But Ms Geras's affidavit (Exhibit A9) stated that voluntary disclosure was offered to Mr Hunt on 3 June 2005 at 1:00 pm (para 9).

48. As Ms Geras's affidavit had been withdrawn, it was not possible to test her evidence by cross-examination, but it was clear that paragraphs 3 and 8, relating to the deponent's use of a script of questions and to the offer of voluntary disclosure on 3 June 2005, were false.

49. Further, the activity log showed that on 23 June 2005 the CVO had decided against penalising the applicant at all. That decision was reversed three hours later at the direction of the team leader (T p68). It was only at that point that voluntary disclosure became relevant.

50. As Mr Hunt had given evidence concerning the conversation on 23 June, the withdrawal of Ms Geras's affidavit gave rise to an inference under
Jones v Dunkel (1959) 101 CLR 298.

51. Given that the applicant had co-operated with the respondent, and that there were clear irregularities in the respondent's records, the flat refusal of remission, despite the failure to give a reasonable opportunity for voluntary disclosure, warranted treatment of the case as one of voluntary disclosure within the meaning of s 284-225(5) of schedule 1 to the TAA1953, or at least as deserving of some remission.

Respondent's submissions

52. The respondent's detailed written submissions pointed out that liability to a tax shortfall penalty under s 284-75(1) of Schedule 1 to the TAA1953 is strict and attaches whether

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it was the applicant or his or her agent who made the false or misleading statement. Where the agent does exercise reasonable care, that taxpayer is liable for any penalty imposed. The taxpayer's remedy against the agent is under s 251M of the Income Tax Assessment Act 1936 (the ITAA1936) (
Kajewski v Commissioner of Taxation 2003 ATC 4375; [2003] FCA 258, at [121];
Re Halim and Commissioner of Taxation [2005] AATA 1274 at [36]).

53. Practice Statement Law Administration (PS LA) 2004/5, which was in force at the relevant time, provides that the standard of care expected of an agent is higher of that expected of a taxpayer who self-prepares and lodges. An agent would be expected to have the skills, knowledge and competence to prepare correct returns, BASs and other tax documents, be reasonably confident about a position taken on the application of a tax law and have procedures in place to ensure that the BASs are correctly prepared. It also states that the penalty will not be remitted if a shortfall results from a client not providing the agent with all the information necessary to prepare a correct document, or if a shortfall results from an agent not requesting information from the client that the agent should have known was necessary (paras 30, 31).

54. PS LA 2006/2, which is currently in force, sets out the four main steps to be taken in applying penalties for false or misleading statements:

  • • Step 1 - determine whether a penalty for false or misleading statement is imposed by law;
  • • Step 2 - assess the amount of penalty;
  • • Step 3 - determine whether the penalty should be remitted in full or in part;
  • • Step 4 - notify the entity of the liability to pay the penalty (at para 22).

55. The applicant had conceded step 1 and the first stage of step 2, the calculation of the base penalty amount. The second stage of step 2 involves aggravating or mitigating factors, such as voluntary disclosure. In this case, s 284-225 of Schedule 1 to the TAA1953 does not apply so as to reduce the base penalty because at no time had the taxpayer voluntarily disclosed the shortfall amount or part of it. It was not until the respondent reviewed the applicant's relevant BAS that the applicant realised it was not entitled to claim an ITC for the property purchase. That was a concession, not a disclosure. Further, from the oral evidence, it was unclear whether even now the directors completely understood that they were not entitled to claim an ITC.

56. Ms Capocchiano's compliance with the request for specific information did not constitute a voluntary disclosure as it was prompted by the Commissioner and related to information already known to the Commissioner. A disclosure made after the audit has commenced qualifies as a voluntary disclosure only if it leads to a significant saving in time or resources. That had not happened here. The pre-June 2005 conversation gave the applicant or its agent an opportunity to make voluntary disclosure, but that was not done. The review extended from 1 January to 31 March 2005 and involved a number of conversations between the respondent's officers and the directors and tax agent of the applicant, but no voluntary disclosure was ever made.

57. As to step 3, s 298-20 of Schedule 1 to the TAA1953 gives the Commissioner a discretion to remit a shortfall penalty, but PS LA 2004/5 para 7 states that a penalty may be remitted where a shortfall amount arises in circumstances where a taxpayer's overall level of compliance is sound, and in all the circumstances it is clear that the shortfall was not a material amount or the taxpayer had made an honest mistake.

58. As the claim was for an ITC of $207,769, a material amount, a greater level of care was required. Further, the applicant's overall compliance history was not sound as it had consistently lodged its BASs late or not at all and amounts and penalties owing to the respondent remained unpaid.

59. The present case in some respects resembled
Re Keitac Pty Limited ATF and Commissioner of Tax [2007] AATA 1026 [sic], in which part of the penalty had been remitted, but was distinguishable in that the present applicant had a poor compliance record and the mistake arose out of a transaction that was extraordinary for the entity during the accounting period.

60. The applicant had submitted that procedural fairness had not been accorded

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because the applicant was never offered the opportunity to make a voluntary disclosure. But the evidence suggested that no voluntary disclosure would have been made in any event. The CVC report showed that voluntary disclosure was offered to Mr Hunt on 3 June 2005 (T p62), but in any event it was open to the applicant and its agent to make a voluntary disclosure at any point.

61. In fact that was unlikely to happen. A voluntary disclosure could not have been made as the applicant was not even aware that it had made a false or misleading statement in the BAS until it was contacted by the respondent. There was no information it could have provided to the Commissioner that would have constituted a voluntary disclosure.

Consideration

62. It is not disputed that until they were contacted by the ATO, the applicant's directors and tax agent were unaware that they could not lawfully claim an ITC for the property purchase. The respondent submitted that even at the hearing, the directors appeared not to clearly understand the true position, and the applicant in submissions did not contradict that.

63. Nor was it disputed that a voluntary disclosure within the meaning of the legislation was not in fact made, though Mr Young submitted that the applicant had co-operated in a reasonably timely manner and had not sought to hide anything.

64. One enigmatic feature of the evidence that should be mentioned at this stage is Mr Rafaletos's uncontradicted assertion that his father, although not a director of the company and not formally involved in any other way, in practice gives instructions to the directors about what they are to do, and they then do it. That suggests that Mr Rafaletos senior is in some sense the directing mind of the corporation. As the applicant bears the statutory onus of proof in these proceedings, it could be argued that the applicant's failure to call him to give evidence should give rise to inference under Jones v Dunkel. That piece of evidence was not referred to by either party in submissions, however. As it is not self-evident that Jones v Dunkel applies here, or that if it does, what is the appropriate inference to be drawn, I do not propose to treat that piece of evidence as probative either way.

65. It is not disputed that PS LA 2004/5 was in force at the relevant time. I accept Mr Young's submission that paragraph 37 of that PS contemplates that the Commissioner will give some significant or reasonable advance notice before the formal commencement date of an audit, because it envisages that a disclosure made during that interval may be treated as having been made before the taxpayer was told about the commencement of the audit.

66. Paragraph 37 does not explicitly require the Commissioner's officers to offer voluntary compliance during that period, but the CVC report form treats that step as part of the standard procedure (T p62). While I do not think that failure to give reasonable notice amounts to a denial of procedural fairness, it would represent a departure from established ATO procedures that might have relevance to the exercise of the discretion.

67. It was not disputed that the audit began no later than 3 June 2005 when the respondent first made telephone contact with the applicant and that, consequently, no significant advance notice of its commencement was given.

68. Mr Hunt's unequivocal evidence was that in his telephone conversation with Ms Geras on 3 June 2005 he was not offered the opportunity to make a voluntary disclosure, and that if he had been, he would promptly have taken appropriate action. The respondent, on the other hand, argued that voluntary disclosure was offered, relying on Ms Geras's note in the CVC report (T p62). That notation is not, however, supported by the activity log (T p67) and Mr Young drew attention to inconsistencies in the time at which the offer was said to have been made, inconsistencies that even the respondent conceded were "embarrassing". As Ms Geras's affidavit was withdrawn by the respondent and she was not called to give evidence, there is no cogent evidence to refute Mr Hunt's claim. I therefore conclude that the applicant has discharged the statutory onus of proof on that point.

69. The respondent's position, however, is that the absence of such an offer is irrelevant because no voluntary disclosure was in fact made during the period of several weeks when the applicant was aware of the audit and was having repeated contacts with the ATO. Further, no voluntary disclosure could have

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been made because the applicant was not even aware that it had made a false or misleading statement in its BAS and there was no information that it could have provided to the respondent that would have constituted a voluntary disclosure.

70. While it is true that nothing amounting to a proper voluntary disclosure was made, the contention that such a disclosure neither would nor could have been made is in my view too speculative. An offer of voluntary compliance might indeed have galvanised Mr Hunt into action to organise a proper voluntary disclosure rather than stumbling along the confused and disorganised path that was in fact followed. Discussions with the directors might have prompted them immediately to repudiate the ITC claim and to set the circumstances before the Commissioner in an organised and coherent way. Mr Rafaletos senior might have stepped out of the shadows to cast whatever light he could on the circumstances of the transaction. In so doing they might have saved the respondent some resources, although probably not a substantial amount.

71. I therefore conclude that some mitigating factors exist that could justify total or partial remission of the penalty as required by stage 2 of step 2 of the process.

72. Step 3 of the process requires a determination of whether the penalty should be remitted in full or in part or not at all. Paragraph 7 of PS LA 2004/5 provides that a shortfall penalty will generally be remitted where the taxpayer's overall level of compliance is sound, and it is clear that the shortfall amount is not a material sum or that the taxpayer has made an honest mistake.

73. As was indicated above, the applicant does not have a good compliance history. Most of its BASs have been lodged late and amounts of tax and penalties have not been paid. The shortfall amount is substantial, especially in relation to the applicant's normal business turnover, and that would dictate taking a greater degree of care. The use of a tax agent does not absolve the taxpayer from the requirement to take reasonable care personally. Signing a form claiming such a large ITC without reading it or querying anything in it cannot be regarded as reasonable. The applicant claims that it honestly believed that GST was included in the purchase price of the property, but the holding of an honest mistaken belief is not relevant to the question of mitigation of a penalty for lack of reasonable care. It could have a bearing on the imposition of higher administrative penalties but not on failure to take reasonable care.

74. The applicant's poor compliance history and the extraordinary nature of the transaction in the context of its business distinguish the present case from Keitac [2007] AATA 1206.

75. On the other hand, there remains the finding that the respondent gave the applicant no significant notice of the commencement of the audit and did not offer the applicant an opportunity to make voluntary disclosure. Although not amounting to a denial of procedural fairness, that constituted a failure to follow the respondent's own established procedures. Those procedures were presumably designed for the purpose of creating optimum conditions for eliciting voluntary disclosure. For the reasons given above, I think that if the standard procedures had been adopted, a voluntary disclosure could have ensued that would have resulted in some saving of resources for the Commissioner. Some allowance should be made for that and I think it warrants partial remission of the penalty.

76. The decision under review is set aside and the shortfall penalty is to be reduced from 25 percent to 15 percent of the tax shortfall amount.


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