TSC 2000 PTY LTD v FC of T
Members:PE Hack SC DP
Tribunal:
Administrative Appeals Tribunal, Brisbane
MEDIA NEUTRAL CITATION:
[2007] AATA 1629
PE Hack SC (Deputy President)
Introduction
1. From the introduction of the goods and services tax (GST) in July 2000 up until mid 2003 the applicant, TSC 2000 Pty Ltd (TSC), was engaged in a business which involved its members (of which there were many thousands) paying a weekly fee of $12.50 (or $13.75) in order to be involved in a Lotto and bonus scheme. TSC paid GST in the 12 quarterly periods between 1 July 2000 and 30 June 2003 on the basis that only a small part of the $12.50 was subject to GST.
2. The respondent, the Commissioner of Taxation, took the view, which he maintains, that the entire amount of $12.50 (or $13.75) was liable to GST. Moreover, the Commissioner took the view that TSC had intentionally disregarded the law in the way in which it dealt with its obligations to pay GST and imposed penalty tax on TSC at the rate of 75%.
3. The issues that I must deal with, stated in their broadest form, are:
- (e) which part or parts of the weekly fee was liable for GST;
- (f) if TSC had a tax shortfall, at what level ought penalty be set.
4. At an earlier time there had been a controversy about the proper treatment, for GST purposes, of monies paid to an international affiliate of TSC. At the outset of the hearing I was informed that TSC no longer pressed the distinction it had earlier drawn between Australian and overseas members. I was informed, as well, that TSC was prepared to accept the accuracy, as a matter of mathematics, of the figures that had been prepared by the Commissioner and that I was not required to decide other than the underlying issues of principle.
Background
5. I propose first to set out a background of uncontroversial facts in order to aid in understanding the matters where there is controversy. I do not understand any of what follows to be in issue.
6. TSC was incorporated sub nom Syndicate Club Management Pty Ltd on 12 May 1997. It changed its name to The Syndicate Club Pty Ltd on 15 February 1999 and to its present title on 3 February 2003. At all times from November 1997 Mr Michael Kuhne has been its sole director. He was, as well, its sole member at all material times.
7. Mr Kuhne had qualifications and experience in computer science and software engineering and had a particular interest in mathematics. He had, as well, an interest in applying mathematics and computing to the Lotto draws conducted by the Golden Casket Lottery Corporation Limited (Golden Casket). His initial foray into the field was with a system called "3 from 6". The detail is presently unimportant but it involved forming a syndicate of 300 players in order to acquire a large number of Lotto tickets and increase the odds of winning. The "3 from 6" system ceased in late 1997.
8. Thereafter Mr Kuhne developed what he called the "OzPower System" and the "Bonus Plan". TSC commenced operating the OzPower System and Bonus Plan in early March 1999. The OzPower System operated on the basis of syndicates of 25 members who paid an initial joining fee and an annual membership fee and thereafter a weekly fee, paid monthly by direct bank or credit card debit. These syndicates participated each week in Oz Lotto, Gold Lotto and Powerball, all competitions conducted by Golden Casket. Each syndicate would have 5 numbers, chosen by TSC, and each week sufficient tickets would be purchased to cover the 5 assigned numbers and all of the remaining numbers in the available range. In that way the
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odds of winning were increased although necessarily any winnings were shared between all members of the syndicate. In addition, purchasing tickets in this manner provided greater prize dividends because the spread of numbers meant that where, for example, a syndicate won the first division prize, it would also win two second division prizes and 37 third division prizes.9. The Bonus Plan was a "pyramid selling" arrangement. I do not intend by that description to conclude that it answers to the statutory description of that term found in the Trade Practices Act 1974 (Cth) and cognate State and Territory legislation. I am not required to reach such a conclusion and do not do so. I use the term because it is descriptive of the means of operation of the Bonus Plan. The Bonus Plan operated on the basis that members encouraged others to join and were rewarded on an ongoing basis when they did so. Those rewards occurred in two ways.
10. The first was described by TSC as the "play for less each week" feature. The effect of that feature was that if, during the period between July 2000 and September 2001 when the weekly fee was $12.50, a member encouraged others to join and the new member nominated the existing member as their "sponsor", the weekly fee to the existing member was reduced by $2.50. And, if five new members were introduced and continued participating, the existing member, as TSC put it, "played for free".
11. The other feature of the Bonus Plan involved the payment of bonuses, by crediting the existing member's account, where the new members themselves introduced other new members. Bonuses are paid in this way down to five "levels".
12. During the period in issue in these proceedings, the weekly fee was $12.50 up until 30 September 2002 and thereafter, until TSC ceased operating around 30 June 2003, the weekly fee was $13.75.
13. Syndicate members paid the fee every four weeks by direct debit from a bank account or credit card. All winnings were paid to syndicate members and those winnings, together with any bonuses, were credited to the individual member's accounts. Where winnings and bonuses resulted in a net credit balance, those balances were paid out in the same four-weekly cycle.
14. In this way, during the period where the weekly amount was $12.50, each syndicate paid $312.50 per week. That sum was allocated in this way:
- • $81.50 was used to purchase 40 games in each of Gold Lotto and Oz Lotto, and 45 entries in Powerball;
- • $24.75 was used by TSC for administration purposes;
- • $200.25 was available to be paid as bonuses to members, with the balance, if any, after payment of bonuses being retained by TSC.
15. At the level of individual members, the break up of the weekly cost over the history of operations was described by Mr Kuhne in this way:
| Cost per week per member | Administration | Members' Bonus Pool | Bank Transaction Fee | Lotto Component | |
| Mar 1999 - Jun 2000 | $10 | $1.13 | $6.00 | $0.40 | $2.47 |
| Jul 2000 - Sep 2002 | $12.50 | $0.59 | $8.25 | $0.40 | $3.26 |
| Oct 2002 - Jul 2003 (Classic/Platinum) | $13.75 or $27.50 | $0.59
$0.59 |
$8.50
$17.00 |
$0.40
$0.40 |
$4.26
$9.51 |
16. I mention, as part of this overall picture, that TSC's members became members only after they had completed an application form. The precise terms of the application form varied from time to time during the period in issue here and are examined in more detail in paragraphs 58 to 64 below. It is also relevant to mention that the promotion of TSC's scheme was undertaken entirely by existing members; there was no advertising done by TSC. When an existing member signed up a new member the new member was supplied with five new member kits comprising blank application
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forms, a periodical debit authority, and the then current version of the promotional booklet.17. It is, as well, relevant to mention the statutory environment in which TSC carried on its business. The conduct of, and participation in, lotteries in Queensland is governed by the Lotteries Act 1997 (Qld). Section 151(1) of that Act provides that, except as a lottery licensee, a person must not, for the person's gain or reward:
- • induce anyone else to take part in an approved lottery;
- • offer to anyone else an opportunity to take part in an approved lottery;
- • advertise or publicly promote subscription to, or taking part in, an approved lottery.
18. These provisions provide the context to TSC's contractual dealings with its members and inform the ongoing disputes between TSC and Golden Casket and the statutory regulator of lotteries, the Queensland Office of Gaming Regulation (QOGR).
19. From an early stage, Golden Casket and QOGR were concerned with the manner in which TSC undertook the Lotto aspect of its business. Eventually, in early June 1999, TSC's solicitors obtained an opinion from Mr F L Harrison QC in which Mr Harrison examined the method of operations used by TSC. He concluded that it did not breach s 151 of the Lotteries Act. Importantly, Mr Harrison's opinion was that,
"the members do not take part in any lottery. Club takes part in the lottery on its own behalf."
20. As a result of this advice, TSC recommenced its business, which had earlier been suspended voluntarily so that the advice could be obtained.
21. As the business grew so too did the complexity of its operations. In July 1999 Mr Paul Higgs, a business consultant, was engaged by Mr Kuhne to work for TSC. In turn, Mr Higgs suggested that TSC needed professional accounting assistance. In about September 1999 the accounting firm KPMG was engaged by Mr Kuhne to undertake accounting and tax advice functions for TSC.
22. Part of the advice from KPMG, and acted upon by TSC, was that TSC should incorporate an offshore entity. In 2000, TSC 2000 Corporation (S.A) (Corporation) was incorporated in Vanuatu. On 2 March 2000 TSC and Corporation entered into what is described as an Administration Agreement, whereby Corporation appointed TSC to be the administrator of the daily operations of Corporation for a term of one year.
23. In the meantime, QOGR commenced criminal proceedings in the Magistrates Court against TSC and Mr Kuhne alleging breaches of s 151 of the Lotteries Act. Those proceedings were adjourned and were eventually overtaken by proceedings commenced by TSC in the Supreme Court of Queensland in July 2002. Those proceedings are discussed further below.
24. It is next relevant to consider a letter of advice dated 22 May 2000 from KPMG to TSC. The purpose of the letter was stated to be:
"to provide advice regarding the proposed method of calculating Goods and Services Tax (GST) on playing fees charged to members and the effect of GST on the international operations"
The advice was based upon the Member Application Form then in use, one that commenced being used by TSC in May 1999 (the May 1999 terms).
25. The KPMG advice, as I read it, proceeded upon an assumption that amounts paid by members:
"…do not relate to a service provided by the club but rather have been incurred by the club in an agency capacity on behalf of its members and GST should not be imposed on the revenue received by the club for these amounts."
The advice noted that the terms and conditions then in use did not "specify that the relationship is one of agency". The author's conclusions were expressed in these terms:
"It is our opinion that to successfully argue that GST is payable only on the $1.20 administration fee the following changes would need to be implemented:
- 1. Clearly state in documentation that the club acts in an agency capacity on behalf of the syndicate members for purchasing tickets, administering syndicates and bonus schemes.
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2. Clearly state in documentation that the only charge the club will levy on members will be a weekly charge of $1.20 per member and all other monies collected will be held and allocated on behalf of the members.- 3. Restructure the club's accounting methods and treat fees received, other than administration charges for ticket purchases, credit card costs and member bonus receipts and payments as being held as an agent or in trust for members rather than as income and expense of the company. These monies should either be recorded in a balance sheet clearing account similar to that currently employed for lotto winnings and members' reserve or alternatively as a separate sub-ledger account similar to what a real estate agent or legal practice would use.
If the funds were held in a separate bank account as an agent or on trust for the members, this would further enhance the appearance that the club is holding the funds on trust for the members and acting in an agency capacity.
It is recognised that the above changes would incur significant additional administrative costs in terms of both time and money. Therefore, the club will need to analyse the costs and benefits of implementing this change as opposed to paying a GST on the full or a partial amount of the fees.
- 4. We note that the club is encumbered by certain restrictions imposed by the gaming act [sic] and may not be in a position to undertake the changes suggested. We would advise the club to seek the legal opinion of its solicitor to review any proposed changes to legal documentation to ensure that you maintain compliance with the relevant lottery and gaming regulations and laws."
26. Thereafter there was a change to the standard terms and conditions of membership with a new version coming into effect from 21 July 2000 (the July 2000 terms). At the same time the weekly fee was increased from $10.00 to $12.50.
27. With the introduction of GST from 1 July 2000, TSC became registered for GST. KPMG prepared and lodged quarterly business activity statements (BAS) on its behalf. In the initial stages, the BAS were prepared on the basis that, of the amounts received from member payments, the only components liable to GST were the administration fee and the residual bonus amount; that is, the amount of the bonus pool not paid out to members and which TSC regarded as its revenue. The bank transaction fee was viewed by KPMG, and the BAS prepared and lodged, on the basis that it was consideration for a financial supply and not subject to GST.
28. A further edition of the terms and conditions of membership came into effect from 20 February 2001 (the February 2001 terms) and a further version came into effect from 1 July 2001 (the July 2001 terms).
29. From October 2002 membership changed and members could be either "Classic", and pay the equivalent of $13.75 per week, or be "Platinum", and pay the equivalent of $27.50 per week. It is not necessary for present purposes to detail the changes brought about at this time with the introduction of the different classes of membership. The break-up of these amounts is set out in paragraph 15 above.
30. The Supreme Court proceedings were heard in September 2002 and judgment given on 30 April 2003[1]
The Commissioner's processes
31. The Commissioner commenced an investigation of TSC in about June 2001. Where necessary I will comment below on the detail of that investigation. It is sufficient for present purposes to note that the audit, which encompassed the business activity statements lodged by the applicant for the twelve quarterly periods between 1 July 2000 and 30 June 2003, was completed on 1 August 2003. On that day, the Commissioner notified TSC that the BAS were to be revised with the result that an amount of GST of $4,996,085 was payable by TSC. Notices of assessment dated 8 August 2003 were served on TSC.
32.
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Subsequently, a meeting was held on 17 September 2003 where representatives of TSC presented further information with the result that the GST liability was reduced by $451,208 to $4,544,877. Notices of assessment dated 6 April 2004 to give effect to this reduction were served on TSC thereafter.33. TSC lodged objections to the assessments under cover of a letter from KPMG dated 29 September 2004.
34. In the meantime, the Commissioner had been undertaking the assessment of administrative penalties. Again, the detail of that assessment will be examined below. It is sufficient for present purposes to note that a notice of assessment of tax shortfall penalty in the amount of $3,513,122.40 was issued on 11 October 2004 and served on TSC thereafter. Penalties were imposed generally at the rate of 75% for "intentional disregard", and to a lesser extent at the rate of 50% for "recklessness". Moreover, the base penalty was increased by 20% for "aggravating circumstances" but the Commissioner did not press for that conclusion at the hearing and I am no longer concerned with it.
35. The penalty assessment was the subject of a separate objection lodged under cover of a letter from KPMG dated 10 December 2004.
36. By letter dated 14 April 2005 the Commissioner notified TSC that the objections to the assessments of GST and to the assessment of penalty had been disallowed in full.
37. These proceedings were commenced on 10 June 2005 and seek a review of the Commissioner's objection decisions.
The issues
Liability
38. There is substantial agreement between the parties as to what the issues are. Mr Robertson, counsel for TSC, contends that the six main issues are:
- (1) Does the assessment offend the principle of fiscal neutrality;
- (a) What was the consideration for TSC's supplies;
- (b) Did TSC make financial supplies;
- (c) Did TSC make gambling supplies;
- (d) If TSC did make gambling supplies, what is its GST liability; and
- (e) Should the Commissioner have assessed TSC on more than it in fact received.
39. I should say that the matters in paragraphs (1) and (6) of Mr Robertson's formulation of the issues seem to me to be more properly described as arguments rather than issues, however these arguments assumed some significance in the case for TSC and I need deal with them however they are described.
40. For his part, Mr Logan SC who led Mr Porter for the Commissioner, accepted that these were the issues but considered them in a different order. In Mr Logan's submission, the primary question was whether there was a gambling supply, and if there was, what was the consideration for the supply.
41. In my view the true questions posed are these:
- (f) Was there a taxable supply involved in the transactions between TSC and its members;
- (g) If there was a taxable supply, what was the nature of the supply;
- (h) What was the consideration for the supply.
The legislation
42. The basic operation of the GST legislation, A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), is well known. By virtue of s 7-1 of the GST Act, GST is payable upon "taxable supplies" and "taxable importations". The circumstances of making a taxable supply are set out in s 9-5 of the GST Act in these terms:
"You make a taxable supply if:
- (a) you make the supply for *consideration; and
- (b) the supply is made in the course or furtherance of an enterprise that you carry on; and
- (c) the supply is *connected with Australia; and
- (d) you are registered, or *required to be registered.
However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed."
43.
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Section 9-10 defines "supply" in wide terms that include a supply of goods, a supply of services, the provision of advice or information, or a financial supply. The term "financial supply" is given meaning by Subdivision 40-A of the A New Tax System (Goods and Services Tax) Regulations 1999. The Dictionary, in s 195-1 of the GST Act, says of "consideration":" consideration, for a supply or acquisition, means any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition."
Section 9-15 defines "consideration" in these terms:
- "(1) Consideration includes:
- (a) any payment, or any act or forbearance, in connection with a supply of anything; and
- (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything."
44. Chapter 4 of the GST Act sets out special rules that apply only in particular circumstances. Division 126, found within Chapter 4, deals with gambling. The explanatory section details the operation of Division 126 in this way:
"Gambling is dealt with under the GST by using a global accounting system that provides for an alternative way of working out your net amounts by incorporating your net profits from taxable supplies involving gambling".
Section 126-35 provides:
- "(1) A gambling supply is a taxable supply involving:
- (a) The supply of a ticket (however described) in a lottery, raffle or similar undertaking; or
- (b) The acceptance of a bet (however described) relating to the outcome of a gambling event
- (2) A gambling event is:
- (a) The conducting of a lottery or raffle, or similar undertaking; or
- (b) A race, game, or sporting event, or any other event, for which there is an outcome."
45. It is necessary as well to have regard to other provisions within Division 126. The maker of gambling supplies is liable to pay a global GST amount with adjustments for other GST liabilities and input tax credits. The global GST amount is calculated in accordance with the charging provision, s 126-10 of the GST Act, which provides, so far as is relevant:
- "(1) Your global GST amount for a tax period is as follows:
(Total amount wagered − Total monetary prizes) × 1 11 where:
total amounts wagered is the sum of the *consideration for all of your *gambling supplies that are attributable to that tax period.
total monetary prizes is the sum of:
- (a) the *monetary prizes you are liable to pay, during the tax period, on the outcome of gambling events (whether or not any of those gambling events, or the *gambling supplies to which the monetary prizes relate, take place during the tax period); and
- (b) any amounts of *money you are liable to pay, during the tax period, under agreements between you and *recipients of your gambling supplies, to repay to them a proportion of their losses relating to those supplies (whether or not the supplies take place during the tax period).
For the basic rules on what is attributable to a particular period, see Division 29.
- (2) However, your global GST amount is zero for any tax period in which total monetary prizes exceeds total amounts wagered."
It is necessary, in the present case, to set out s 126-30. It provides:
- "(1) An acquisition of a thing is not a *creditable acquisition if the supply of the thing acquired was a *gambling supply.
- (2) This section has effect despite section 11-5 (which is about what is a creditable acquisition)."
46.
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The particular relevance of s 126-30 of the GST Act is that ordinarily, where a business acquires goods or services, the amount of any GST paid is a creditable acquisition and goes to reduce the amount of GST required to be remitted to the Commissioner. If, as the Commissioner contends, amounts paid by TSC to acquire lottery tickets merely amounted to TSC laying-off its bets, then the acquisition of those tickets was not a creditable acquisition.Was there a supply
The rival contentions
47. The case for TSC is neatly summarised in this way[2]
"Only Golden Casket made gambling supplies. Only Golden Casket accepted wagers and was liable to pay prizes for the purpose of section 126-5. The applicant did not bet with the members that the numbers would not come up. It was not liable to pay prizes if it lost those bets. Rather, it was liable to pass on the prizes won, and liable only if it breached its obligation to pass on those prizes."
48. The case for TSC in support of this proposition was, in essence, that it was merely an agent for the members, using the members' money to acquire Lotto tickets on their behalf, paying bonuses to members entitled to receive them, and passing on any prizes received from Golden Casket to the winning members. The words used in the various versions of the terms and conditions were relied upon to support the notion of an agency relationship. In the case for TSC it was only the components of the weekly fee for administration, bank transaction fees, and the bonus surplus that represented a taxable supply.
49. The Commissioner contends that the true relationship between TSC and its members was not one of agency; instead the relationship was one where each member made a bet with TSC and that TSC placed its bet with Golden Casket and thereby laid-off its risk. In the Commissioner's case, the whole of the payments of $12.50 (or $13.75) represents consideration for a taxable supply.
The approach to construction
50. It is convenient at the outset to deal with an issue that relates to the proper approach to the construction of the legislation. It is issue (1) in the list of issues raised by TSC; whether the assessment offends the principle of fiscal neutrality.
51. Much reliance is placed by TSC on the notion of "fiscal neutrality". That principle was described in the speech of Lord Walker of Gestingthorpe (with whom a majority agreed) in
Lex Services plc v Customs and Excise Commissioners[3]
"Its central core meaning…is that whether goods purchased by the final consumer have been through the hands of a dozen different traders at successive stages of their manufacture, distribution and marketing or are the product of a single manufacturer who is also a retailer the VAT system should (through its mechanisms of input tax and output tax) produce the same end result (and similarly for services)…"
52. In this country, and in the context of the legislation in issue here, it was described by Hill J in
H P Mercantile Pty Ltd v Commissioner of Taxation[4]
"The language of the GST Act, as seen in the context of value added taxation generally, makes it clear that the legislative scheme is that a taxpayer will be entitled to an input tax credit where it is necessary that a credit be given to ensure that output tax payable by the taxpayer is not imposed upon an amount which already includes tax payable at some early stage in the commercial cycle. Where possible, GST is not to be found embedded in the price or consideration on which output tax is calculated when taxable supplies are made. However, in the case of the taxpayer which makes input taxed supplies, while that taxpayer will not be liable to output tax on the supplies it makes which satisfy the description of input taxed supplies, that taxpayer will be denied an input tax credit for the tax payable on acquisitions it makes where the necessary relationship exists."
53. This principle of fiscal neutrality operates here, in TSC's submission, on the basis that the GST imposed on the members should be the same whether members spend their money directly with Golden Casket or whether it passes through TSC to Golden Casket.
54.
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As it seems to me, the principle of fiscal neutrality is of limited application in the present case. There are at least three reasons why that is so. First, the principle is an aid to construction where it is necessary to determine which of competing constructions is to be preferred; it does not operate to modify the plain operation of the statute. If there is a supply from a practical and business point of view of the ordinary meaning of "supply" then recourse to the principle of fiscal neutrality is unnecessary and unwarranted. As has been said recently[5]"… what lies behind the enactment of a taxing provision as a matter of public policy or economic theory is not the same thing as the elements or criteria of tax liability which Parliament has laid down."
55. In addition, Division 126 is one of a series of "special rules" found in Chapter 4 of the Act to deal with particular forms of business activity. What is taxed, as a matter of legal analysis, is not consumption but a particular form of transaction, namely supply[6]
56. The starting point of that legal analysis is the proper construction of the relationship between the parties. That, as has been recently re-affirmed[7]
"normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction."
57. Here, TSC submits, those surrounding circumstances include the Product Booklet and Bonus Plan Booklets provided to members. It is necessary for me to consider the terms and conditions of membership and the booklets as they were in force at various times.
The contractual documents
58. It is useful for the purposes of comparison to start with an examination of the May 1999 terms. The terms and conditions were printed on the reverse of the Member Application Form. Each Member Application Form was uniquely numbered and for that reason copies were not accepted by TSC. The application was in the nature of an offer by the prospective member. Once accepted by TSC the member was bound by the terms and conditions, however those terms were expressed to apply only between TSC and the individual member. Clause 3 stated:
"There is no contract between you and any other member."
59. Important for present purposes are clauses 5 and 6 which provide:
- "(5) A total of 25 cards with 5 identical playing numbers will be issued…We purchase all the Oz Lotto and Powerball coupons in our name… In effect we will stand in the relationship to you of debtor (us) and creditor (you) so that we will be personally liable to you for any amount due to you in the event of a win, whether or not we cover the numbers on your card.
- (6) Where any combination of the numbers specified on the card issued to you result in a win in Oz Lotto or Powerball, we will pay you an amount equal to 1/25 of the winnings applicable to an entry with those numbers."
Clause 7 made reference to the Bonus Plan "which is set out in … brochures which we issue". Clause 15 reserved to TSC the right to unilaterally vary the terms and conditions by the giving of notice but not in a way that reduced bonuses.
60. The July 2000 terms contained some variations including the introduction of the notion of agency. Clause 4 provided:
- "(4) A total of 25 cards each with a set of 5 identical numbers will be issued. For ease of identification we call each card group an "OzPower Syndicate". We purchase all the Saturday Night Lotto, OzLotto and Powerball coupons in our name. The numbers we select cover the field, our "OzPower System". We will stand in the relationship to you of debtor (us) and creditor (you) for which we will be personally liable to you for any amount due to you in the event of a win, whether or not we cover the numbers on your card. We will buy the tickets on our own behalf, but on the basis that you will be entitled to the appropriate amount out of any prize money. We will collect that amount on your behalf as your agent. You will acquire no interest in those tickets or in the OzPower system as what is being provided by us is a service to you. The distribution of bonuses will be on the basis of an agency by the Club with you, and the Club with its members, for whom the Club will be acting as an agent for you also in this respect. The Club will retain the remainder of any undistributed moneys not due and payable by the Club pursuant to the bonus plan, to any member in the Club's capacity as an agent for you and for them. This surplus (if any) is a return for a service we provide.
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(5) Where any combination of the numbers specified on the card issued to you result in a match on a subsequent Saturday Night Lotto, OzLotto or Powerball draw, we will pay you an amount equal to 1/25 of the winnings applicable to an entry with those numbers. We do not keep a percentage of any prize monies won nor will we impose any hidden charges. We will pay this money directly into your account but may elect to pay this to you by other means, for example, by cheque at the commencement of each payment cycle. The position will vary slightly for a Division 1 prize in which case payment will be made to you within 3 business days from the date we receive the prize money."
61. The February 2001 terms did not effect any material variations so far as I can ascertain.
62. There was a substantial re-design of the application form and the terms and conditions effected by the July 2001 terms. The application form required prospective members to make a declaration for the purposes of the GST legislation. Clauses 3 and 5 now provide:
- "3 Membership Card
- 3.1 If we accept you as a Club Member, we will issue you with a card. Five numbers that we select are printed on your Card.
- 3.2 We will issue up to a total of 25 Cards to members of the Club, which have the same five numbers as printed on your Card.
- 3.3 Subject to clause 3.5, where any combination of numbers printed on the Card issued to you, plus any other number, result in a match in a Saturday Night Lotto or OzLotto draw while you are a Club Member, we will credit your Club account with an amount equal to 1/25 of the corresponding winnings applicable to an entry in such lottery with those numbers.
- 3.4 Subject to Clause 3.6, where any combination of numbers printed on the Card issued to you result in a match with the numbers drawn from the first machine in a Powerball draw while you are a Club Member, regardless of the Powerball number, we will credit your Club account with an amount equal to 1/25 of the corresponding winnings applicable to an entry in such Powerball lottery with those numbers.
- 3.5 Where any combination of numbers printed on the Card issued to you, plus any other number, result in a match in a Saturday Night Lotto or OzLotto draw while you are a Club Member that is equivalent to a Division 1 prize, we will pay you by cheque in Australian dollars an amount equal to 1/25 of the corresponding winnings applicable to an entry in such lottery with those numbers.
- 3.6 Where any combination of numbers printed on the Card issued to you result in a match with the numbers drawn from the first machine in a Powerball draw while you are a Club Member that is equivalent to a Division 1 prize, regardless of the Powerball number, we will pay to you a cheque in Australian dollars an amount equal to 1/25 of the corresponding winnings applicable to an entry in such Powerball lottery with those numbers.
- 5 Lottery Tickets
- 5.1 We do not buy lottery tickets in your name or on your behalf. By virtue of your membership of the Club, you do not acquire any interest in any lottery ticket or participate in any lottery.
- 5.2 We stand in a relationship to you of debtor and creditor only.
- 5.3 We do not draw any numbers or determine the amount of any prize.
- 5.4 We do not conduct a lottery and we do not have a license to conduct a lottery."
63. It is necessary also to have regard to the provision in Part B governing the Bonus Plans. Clauses 1.4 and 1.6 provide:
- "1 The Bonus Plan
…
- 1.4 To the extent that the payment of the weekly participation fee may represent bonuses paid to other Club Members under this Part B, the Club acts as agent and the Club Member making the payment acts as principal in paying such amount.
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1.6 No fees will be payable by the Club to you for the introduction of others who subsequently become Members."
64. In February 2003 another set of terms and conditions (the February 2003 terms) was introduced. The February 2003 terms again appear not to have effected any material alterations.
Consideration
65. Whichever set of terms and conditions apply I am unable to accept TSC's essential proposition that it merely acted as agent for the members and facilitated Golden Casket making gambling supplies to the members.
66. The July 2000 terms required members to pay the sum of $53 on a four-weekly basis in order to participate for that four-weekly period. But TSC was acquiring the tickets in its name and the members had no interest in the tickets. In the event of a win, the individual member was not to receive 1/25 of the winnings but an amount equal to 1/25 of the winnings applicable to an entry with numbers that matched the winning numbers. And the reference to the basis of liability - "whether or not we cover the numbers on your card" - seems to me to make it plain that TSC was not covenanting to buy the tickets.
67. The position was not markedly different with the introduction of the July 2001 terms. TSC did not buy lottery tickets in the names of, or on behalf of, members and membership gave the member no interest in any lottery ticket.
68. The references to TSC being the agent for the members do not detract from this conclusion. The legal description to be applied to a contractual relationship is to be determined by reference to the terms of the relationship rather than the description applied by one of the parties[8]
69. Similarly, reference to the Product Booklets does not detract from this conclusion. While the various versions of the booklets expanded upon the way in which TSC operated, there is nothing in them that qualifies the terms that I have set out.
70. TSC's case based on contract was put in this way in its submissions:
"Having regard to the terms and conditions of the Syndicate Club at any point in time there is little doubt a court would find that the applicant held the proceeds of any winnings, and, more significantly, any moneys received in order to purchase tickets, on trust for each 25-member syndicate. It was obliged to buy sufficient tickets in advance to cover each syndicate's numbers, and identified those tickets purchased for each 25-member syndicate. It expressly purported to act under the agreements before July 2001 as each member's agent in purchasing tickets and all winnings were held on member's behalf. Golden Casket was acutely aware of its operations, as was the Labrador newsagency."
71. It is not clear to me how the matters in the concluding sentence, if true, impinge upon the question in issue however I am unable to agree with the balance of this submission. The members may well have believed that TSC was buying (or arranging to buy) tickets on behalf of the various syndicates but the subjective views of the parties are not relevant, especially where, as here, they do not accord with the document that governs the relationship between the parties. All versions of the terms expressly precluded the members from acquiring any interest in any lottery ticket. TSC, under all versions of the terms, did not covenant to pay 1/25 of the share of the winnings, rather it covenanted to pay (or credit) "an amount equal to 1/25 of the corresponding winnings." And, the versions before July 2001 seem to give TSC a choice whether to buy tickets or not.
72. The submission was advanced further on the basis that payment by members to TSC came within the Quistclose trust principle[9]
Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) Gibbs CJ said of the decision in Quistclose[10]
"That case is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the
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money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character or trust."
73. What excludes the operation of a Quistclose trust here is that there is either or both of an absence of the mutual intentions (gauged by reference to the documents rather than subjective considerations) and an indication of a contrary intention. That is so because I do not regard the contractual provisions as creating an enforceable obligation upon TSC to purchase lottery tickets.
74. It is understandable that TSC would structure the terms and conditions of membership in a way that seeks to avoid breaching s 151 of the Lotteries Act. However, it is the terms and conditions of the contract that must be given effect to in considering the nature of the relationship between TSC and its members. It is notable (but not determinative) that TSC advanced its case to the Supreme Court in quite different terms to that which it now advances. Its argument in the Supreme Court was recorded by the learned trial judge in this way[11]
- "[37] [TSC] submitted that an OzPower member had no legal entitlement to a lottery ticket purchased by Mr Kuhne, nor did any trust or beneficial interest in the ticket or the winnings from it arise in the member's favour …
- [38] Critical to [TSC's] submissions is clause 5[12]
Set out at paragraph 62 above. of the membership terms and conditions. [TSC] relied on that provision in submitting that [TSC] does not in law purchase any tickets in an approved lottery on behalf of any member and that a member does not therefore hold a ticket in an approved lottery. It was said that a member has no entitlement to a lottery ticket purchased by Mr Kuhne, nor its proceeds. Nor was there any legal obligation on [TSC] to purchase any tickets in an approved lottery on behalf of a member.- [39] It was said that the fees paid by the member to [TSC] were not held on any trust for the members and that [TSC] was not contractually obliged to use the fees in any specified manner, for example to purchase lottery tickets …"
75. I mention these matters not on the basis that TSC is bound in any way by the way it conducted its case before the Supreme Court but because the argument advanced there by TSC as to the rights and obligations arising from participation in the scheme was, in my view, a correct legal analysis of the scheme, and the argument advanced before me in these proceedings was not. In the result, Philippides J did not find it necessary to reach any concluded view on the legal or equitable entitlements of members. Her Honour declined to make a declaration that members did not take part in an approved lottery on the basis of her Honour's view of the width of the expression "take part in".
76. It is now necessary to revert to the statutory definition of a gambling supply. The case for the Commissioner is that there was a taxable supply between TSC and each member that involved either or both of the supply of a ticket in a lottery and the acceptance of a bet relating to the outcome of a gambling event. It seems implicit in the case for TSC that there is a gambling supply; the case for TSC is that the supply is by Golden Casket to members rather than by TSC to members.
77. The Act contains no definition of "bet". The Commissioner's submissions referred to the definition in the Macquarie Dictionary where the noun "bet" is described as "a pledge of something to be forfeited, in case one is wrong, to another who has the opposite opinion." Similarly, in the Oxford English Dictionary Online it is described as "the backing of an affirmation or forecast by offering to forfeit, in case of an adverse issue, a sum of money or article of value, to one who by accepting, maintains the opposite, and backs his opinion by a corresponding stipulation; the staking of money or other value on the event of a doubtful issue; a wager; also, the sum of money or article staked".
78. In my view, the transactions here answer the description of bet; it is a wager between the member and TSC where the event that determined the success or otherwise of the bet was the lottery conducted by Golden Casket. But that lottery was merely the reference point that determined the outcome of the members' bets. Where the five numbers on a member's card matched five numbers drawn in the lottery conducted by Golden Casket then the member was entitled to be paid the equivalent of 1/25 of
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the Division 1 prize in the Golden Casket lottery because, as Mr Kuhne put it, TSC "guaranteed" the sixth number which was required for a Division 1 win in the Golden Casket lottery.79. TSC made bets with Golden Casket when Mr Kuhne purchased lottery tickets in his name, but on behalf of TSC. In that way Golden Casket provided gambling supplies to TSC.
80. The conclusion that there was a gambling supply between TSC and a member can also be reached by reference to the other limb of the definition of gambling supply, the supply of a ticket in a lottery. The term "lottery" is not defined but the accepted common law meaning is[13]
"A distribution of prizes by lot or chance."
81. It is irrelevant that the "chance" referred to above is based on a chance organized by another; the members were, in my opinion, participating in a lottery arranged by TSC where the reference point on which prizes were based was the conduct of lotteries by Golden Casket. Each member had a ticket in a lottery. A ticket, according to the Macquarie Dictionary, Revised Edition, is:
"a slip, usually of paper or cardboard, serving as evidence of the holder's title to some service, right or the like".
Here, according to Mr Kuhne[14]
"When first joining TSC, TSC allocates to the member five numbers in the range 1 to 45. These numbers are printed on a card provided by TSC to the member."
82. In my view, the nature of the OzPower scheme was such that TSC made gambling supplies to its members.
83. TSC maintains that that conclusion should not be reached as it offends the principle of fiscal neutrality. Rather, it says that the result of the application of the principle of fiscal neutrality should be that the GST imposed on the members should be the same money is spent directly with Golden Casket or whether it passes though TSC to Golden Casket. The result of the Commissioner's assessment, says TSC, is that it taxes TSC of the $3.26 component even though it adds no value and Golden Casket is also taxed. This result is, it is said, "very odd … a good clue to its being wrong."
84. The result may be regarded as being "odd", however it seems to me that the oddity arises as a consequence of the particular statutory provisions that apply to this case. Section 126-30 of the GST Act operates to prevent the principle of fiscal neutrality operating here. In
HP Mercantile Pty Ltd v Commissioner of Taxation[15]
"The genius of a system of value added taxation, of which the GST is an example, is that while tax is generally payable at each stage of commercial dealings ('supplies') with goods, services or other "things", there is allowed to an entity which acquires those goods, services or other things as a result of a taxable supply made to it, a credit for the tax borne by that entity by reference to the output tax payable as a result of the taxable supply. That credit, known as an input tax credit, will be available, generally speaking, so long as the acquirer and the supply to it (assuming it was a 'taxable supply') satisfied certain conditions, the most important of which, for present purposes, is that the acquirer make the acquisition in the course of carrying on an enterprise and thus, not as a consumer. The system of input tax credits thus ensures that while GST is a multi-stage tax, there will ordinarily be no cascading of tax. It ensures also that the tax will be payable, by each supplier in a chain, only upon the value added by that supplier."
85. But in the case of gambling supplies, s 126-30 of the GST Act prevents the acquirer from getting credit, by way of input tax credits, for its acquisitions that constituted gambling supplies. Thus, on my analysis of the transactions, what occurs is that TSC is laying-off its bets by acquiring gambling supplies through purchasing lottery tickets and is not entitled to credit on the GST paid to Golden Casket on those tickets.
86. TSC also argues against the conclusion that makes it gambling supplies by reference to the context and purpose of Division 126 of the GST Act. It is said that Division 126, by reference to the Explanatory Memorandum, is put in place as an administrative concession to gambling operators; it was not intended,
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"to alter the consequences that would apply under the ordinary provisions, but to obviate the need for GST to be worked out on an individual by individual basis."
87. I accept that is so, but the flaw in TSC's argument is that TSC was not a person who organised syndicates, for a fee, to buy tickets in bulk from a commercial gambling enterprise[16]
88. In supplementary submissions lodged after the conclusion of the hearing, TSC put its argument in a different way. The argument advanced was in these terms:
- "(a) The applicant has obligations to each member to make separate supplies of money, being payments (i) to Golden Casket and (ii) among the members under the Bonus Plan.
- (b) The money the applicant received from each member to make those payments, whilst consideration in connection with those supplies of money, was not consideration for a supply under s 9-5. Supplies of money are excluded by s 9-10(4) from the definition of "supply" for the purposes of s 9-5.
- (c) Conversely, the payments to Golden Casket and among the members under the Bonus Plan, whilst consideration in connection with the applicant's acquisition of money from each member, was not consideration for an acquisition under s 11-5. Acquisitions of money are excluded by s 11-10(3) from the definition of 'acquisition' for the purposes of s 11-5.
- (d) Accordingly, the gross inflows and outflows of money are ignored for GST purposes, leaving the applicant taxable on the amount it was not obliged to supply to Golden Casket and among the members as the consideration in connection with the facilitation services it provided."
89. It will recalled that there is a taxable supply where a supply is made for consideration, and consideration includes any payment in connection with a "supply". This argument relies upon s 9-10(4) of the GST Act which, with an irrelevant exception, excludes a supply of money from the ambit of supply.
90. TSC's argument fails at the first step, so far as the payment to Golden Casket is concerned, in light of my conclusion that TSC was not obliged to buy tickets for members and that when it bought tickets it was not doing so on behalf of the members. Thus, I do not accept the submission by TSC that the $3.26 component was consideration in connection with the supply of money to Golden Casket. The argument might succeed were it to be the case that TSC was merely taking money from members and using that money to buy tickets for members but on my analysis that is not what occurred here.
91. The fundamental flaw in this argument in my view is in the characterisation of the payment as payment "in connection with" the supply of money to Golden Casket and to members under the Bonus Plan. This is not a situation where TSC has covenanted with its members to return to each member $8.25 out of every $12.50 payment in order to give effect to the Bonus Plan. At best, it has agreed to create a pool of money from which payments, by way of bonuses, may be made to members where the conditions of the joining of new members were satisfied. That is to say, members did not pay $12.50 in order to receive $8.25 in bonuses; members paid $12.50 for the opportunity to participate in the lottery conducted by TSC. Beyond that, if the members that existing members introduced then introduced new members, there was the opportunity to benefit from bonuses, both in cash and in kind[17]
92. TSC was not supplying money to members. In relation to the $3.25 component or the $8.25 component, it was supplying the opportunity to participate in a scheme which increased the odds of winning the equivalent of the prizes offered by Golden Casket and, for those who wished, the opportunity to make money and win other prizes by introducing new members.
93. The next argument for TSC is that the amount received in respect of the Bonus Plan, the $8.25 component, was consideration for a
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financial supply and not subject to GST. That argument was not raised in TSC's notice of objection. At the outset of the hearing I gave TSC leave to amend its notice of objection to include this argument. The argument is that TSC "was in fact selling annuities to the members i.e. promises to pay them periodical sums until they ceased membership."94. The expression "financial supply" is given meaning by Subdivision 40-A of the A New Tax System (Goods and Services Tax) Regulations 1999. By virtue of Reg. 40-5.09, the provision of an annuity would be a financial supply if the provision were to be for consideration, in the course of the provider's business, and connected with Australia. But I am unable to accept the argument that the provisions of the Bonus Plan meant that what was provided amounted to an annuity.
95. Both parties referred me to the decision of the Full Federal Court in
Australia and New Zealand Savings Bank Ltd v Commissioner of Taxation[18]
"There is good reason why the question whether a particular payment is an instalment of an annuity or part repayment of capital with interest must be determined as a matter of form, rather than substance. In every case where a term annuity is involved, the substance of the transaction will involve an investment of a capital sum by an investor to produce a return to the annuitant, calculated by reference to that capital sum to which is applied an agreed or defined percentage interest rate."
96. I find it impossible to conclude that the Bonus Plan answered this description. The "investor" here is the member. That member is not investing a capital sum in anticipation of a return. The member is paying into a pool and, if the member introduces further members and those members in turn introduce further members, an amount will be paid to the original member. But that payment bears no relationship to the amount of money paid by the original member; it is entirely dependent upon the number of members introduced "below" the original member.
97. Whatever may be the correct description of the transactions involved in the Bonus Plan, it was not an annuity. The money paid by members to TSC in respect of the Bonus Plan was not consideration for a financial supply.
The consideration for the supply
98. There is a degree of artificiality involved in the notion that underpinned TSC's case that the weekly amounts could or should be dissected up into several components. Even assuming that promotional material showed a dissection of money in the form of a pie chart, I do not regard that as establishing that members ought be regarded objectively as having dissected the amount paid in this, or any other, way. Rather, I consider that members would have objectively regarded the monthly payments as the price to participate in a scheme which increased the odds of winning the equivalent of the prizes offered by Golden Casket and the opportunity, for those who wished, to make money and win other prizes by introducing new members.
99. On that basis, that it is equally artificial to seek to divide, for GST purposes, the amounts paid once it is accepted that no part of the amount paid was referable to a GST-free element. It seems to me not to matter whether the GST liability is worked out by reference to the total amount paid or by reference to the component parts. By reference to TSC's promotional material I would have thought that the whole of the weekly payment was a payment made in connection with the supply of gambling services. As the submissions for the Commissioner point out[20]
100. On that basis I conclude that the payment was a payment in connection with the supply of the OzPower system.
The proper application of Division 126
101. I turn then to the fifth issue identified by counsel for TSC; what was TSC's GST liability on the assumption that it did make gambling supplies.
102. The argument starts with the charging provision in s 126-10 of the GST Act[21]
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"dedicated" to the purchase of lottery tickets and the return of bonuses. That is so, it is argued, because the consideration for the gambling supplies was TSC's remuneration for its services, not what was paid by members.103. I am unable to accept that argument, given my conclusion on the entitlements of TSC and its members in accordance with the terms and conditions that governed relations between TSC and its members.
104. TSC presented a further argument that the Bonus Plan amounted to an agreement with members to repay a proportion of their losses i.e. that the amounts referable to the Bonus Plan came within the definition of "total monetary prizes" and thus was to be deducted from the total amount wagered in order to determine the "global GST amount". That argument must also fail. On no view were the members being repaid a proportion of their losses. Those members who participated were being paid bonus amounts as reward for recruiting new members.
105. The final argument[22]
Manzi v Smith[24]
106. But the situation in that case is readily distinguishable. The entries in that case were journal entries in the books of account of a company in liquidation. The respondents to a liquidator's preference were not shown to have been privy to the journal entries or to have had knowledge of them or to have adopted them. On that basis, it was held that there was no evidence that the company had made payments to the respondents in the terms suggested by the journal entries. Here, the situation is quite different. In each billing cycle members were sent a statement that set out the full amount debited and the full amount credited[25]
107. I am not satisfied that the assessment is excessive because it relied on the gross amounts paid rather than the net amounts after making allowance for amounts credited to members.
Conclusions - liability
108. It follows that I am not satisfied that the assessments made by the Commissioner for the quarterly tax periods from 1 July 2000 to 30 June 2003, and evidenced by notices of assessment dated 6 April 2004, were excessive. I would affirm the Commissioner's objection decision dated 14 April 2005 to that extent.
The penalty assessment
109. It is common ground that TSC has the onus of demonstrating that the penalty assessment is excessive[27]
- (a) that the penalty assessment is void because it was not a bona fide assessment;
- (b) that the penalty assessment is invalid because it was not duly made i.e. there was an error of law on the part of the decision maker;
- (c) that the penalty assessment is wrong by reference to objective facts.
110. TSC seeks to amend the grounds of its notice of objection in order to raise the first and second of these arguments. I would give leave for it to do so. The argument is based on the evidence already in and it is not suggested on the Commissioner's side that any further evidence should or need be called to deal with the point.
111. In addition to these arguments, TSC submits that the Tribunal has power pursuant to s 298-20 of the Taxation Administration Act 1953 (the TAA) to remit any penalties that remain and that it ought to do so in this case.
The statutory framework
112. Part 4-25 of the TAA is headed "Charges and Penalties". Within that Part is Division 284 headed "Administrative penalties for statements, unarguable positions and schemes". It is only the first of these matters, the making false or misleading statements, which arises here. By virtue of s 284-75(1) of the TAA, a taxpayer is liable to an administrative penalty if the taxpayer (or agent)
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makes a statement to the Commissioner that is false or misleading in a material particular and the taxpayer has a shortfall amount as a result of the statement. It will suffice for present purposes to note that there will be a shortfall amount where the tax liability, based on the false or misleading statement, is less than it would be were the statement not to be false or misleading.113. The amount of penalty is determined by reference to s 284-85. That section requires three steps - the determination of the base penalty amount under s 284-90, the determination of any increase (expressed as a percentage) under s 284-220 for aggravating conduct, and the determination of any reduction (also expressed as a percentage) under s 284-225 for any mitigating factors.
114. The calculation of the base penalty amount is undertaken by reference to descriptors in s 284-90. That section imposes base penalty amounts of:
- • 75% of the shortfall amount where the shortfall resulted from intentional disregard;
- • 50% of the shortfall amount where the shortfall resulted from recklessness;
- • 25% of the shortfall amount where the shortfall resulted from a failure to take reasonable care.
115. The base penalty amount can be increased by the aggravating circumstances set out in s 284-220 of the TAA. Whilst the Commissioner's penalty assessment was based upon the existence of an aggravating factor, that matter is no longer pressed and it is unnecessary to pay further regard to that section.
116. The base penalty amount can be reduced by the mitigating factors in s 284-225 of the TAA. It is in these terms:
"284-225 Reduction of base penalty amount
- (1) The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced by 20% if:
- (a) the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; and
- (b) after that time, you voluntarily tell the Commissioner, in the *approved form, about the shortfall or the part of it; and
- (c) telling the Commissioner can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the audit.
- (2) The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced under subsection (3) or (4) if you voluntarily tell the Commissioner, in the *approved form, about the shortfall amount or the part of it before the earlier of:
- (a) the day the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; or
- (b) if the Commissioner makes a public statement requesting entities to make a voluntary disclosure by a particular day about a *scheme or transaction that applies to your financial affairs-that day.
- (3) The *base penalty amount for your *shortfall amount, or for part of it, is:
- (a) reduced by 80% if the shortfall amount, or the part of it, is $1,000 or more; or
- (b) reduced to nil if the shortfall amount, or the part of it, is less than $1,000.
- (4) The *base penalty amount for your *scheme shortfall amount, or for part of it, is reduced by 80%.
- (5) If you voluntarily tell the Commissioner, in the *approved form, about your *shortfall amount or *scheme shortfall amount, or part of it, after the Commissioner tells you that a *tax audit is to be conducted of your financial affairs, the Commissioner may treat you as having done so before being told about the audit if the Commissioner considers it appropriate to do so in the circumstances."
117. The mechanism for the ascertainment and recovery of administrative penalties imposed under Division 284 mirrors, to some extent, the regime for income tax. Section 298-30(1) requires the Commissioner to "make
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an assessment of the amount of an administrative penalty under Division 284". The Commissioner must give written notice of the liability and the reasons why the taxpayer is liable to pay the penalty[28]118. A taxpayer dissatisfied with the Commissioner's assessment may object to it in the manner set out in Part IVC of the TAA[30]
119. Finally, I should note s 298-20 of the TAA. It provides:
- "(1) The Commissioner may remit all or a part of the penalty.
- (2) If the Commissioner decides:
- (a) not to remit the penalty; or
- (b) to remit only part of the penalty;
the Commissioner must give written notice of the decision and the reasons for the decision to the entity."
The penalty assessment as made
120. The task of making the assessment in issue here was undertaken by Mr Gary Folland. The assessment is Exhibit 22 in the proceedings. It sets out the conclusions reached by Mr Folland and the factual bases for those conclusions. Mr Folland swore an affidavit and was cross-examined by counsel for TSC.
121. Mr Folland took the view that TSC had shortfall amounts arising from four circumstances described in the assessment as follows:
- (a) shortfalls as a result of failing to report supplies made to Australian residents that were treated by TSC as non-residents;
- (b) shortfalls as a result of failing to report the whole amount of the gambling supply;
- (c) shortfalls as a result of failing to report other supplies;
- (d) shortfalls arising from claiming input tax credits for acquisitions that were considerably more than those that could be substantiated by tax invoices.
122. The aggregation of the shortfalls of GST payable on taxable supplies was $4,081,860.00 and for the over-claimed input tax credits the shortfall was $77,951.
123. In relation to the matters referred to in paragraph 121(a) and (b) above, Mr Folland took the view that there had been intentional disregard on the part of TSC warranting a base penalty amount of 75% of the shortfall amount attributable to those causes. The matters in paragraph 121(c) and (d) above were regarded as warranting the conclusion of reckless and the imposition of a base penalty amount of 50% of those shortfalls.
124. Mr Folland then considered aggravating circumstances and concluded that TSC's conduct warranted the imposition of the 20% increase in base penalty amount under s 284-220 of the TAA. As I have stated, that is no longer pressed by the Commissioner.
125. Finally, Mr Folland considered the power to remit administrative penalties under s 298-20 of the TAA but did so by reference only to Practice Statements PS LA 2000/9 and 2002/8[32]
126. Given one of the challenges made to the evidence of Mr Folland it is relevant to note the content of his affidavit. In essence, the affidavit set out his dealings with TSC and its representatives. It makes no reference to the work he undertook in making the penalty assessment, nor the conclusions he reached in doing so. Similarly, when he was called to give evidence in the course of the hearing, senior counsel for the Commissioner did not seek to lead any additional evidence from him.
127. The written submissions for TSC made reference to Mr Folland's views that TSC had deliberately taken steps to hinder the Commissioner in the execution of his duties. The submissions then continued:
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"Mr Folland was not prepared to give sworn evidence in chief to support his allegations of deliberate deception. This is astonishing given the seriousness of the allegations he made."
128. Like all witnesses, Mr Folland is not immune from criticism, however any criticism of witnesses ought be fair. This particular criticism of Mr Folland was not fair for two reasons. First, it assumes that despite the fact that the conduct of the proceedings has been entrusted to experienced solicitors and counsel it was for Mr Folland, and not those lawyers, to determine the content of his affidavit or what further evidence in chief ought to have been elicited. As the submissions for TSC recognise, those representing the Commissioner took the view that the question of whether there was a penalty is something that the Commissioner's officers need not give evidence about because it was a question of law.
129. The submissions for TSC took issue with the correctness of that view but, whether it be right or wrong, it is not fair to criticize Mr Folland on what was not deposed to in his affidavit or lead in his evidence when those who relied on his evidence had the view they had.
130. I turn then to a consideration of the arguments advanced by TSC.
Not a bona fide assessment
131. The arguments for TSC set out in paragraphs 109(a) and (b) may be considered together as they are based upon a common factual premise; the allegation that Mr Folland had no belief that TSC had intentionally disregarded the GST law at the time he made the penalty assessment.
132. A considerable part of the penalty assessment was on the basis that the shortfall resulted from "intentional disregard" of a taxation law by TSC or its agent. The Commissioner's Practice Statement[33]
"show that an entity consciously decided to disregard clear obligations under a taxation law, of which the entity was aware."
Similarly, in
Price Street Professional Centre Pty Ltd v Commissioner of Taxation[34]
"requires, inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the [legislation] or regulations."
133. Mr Folland's reasoning and his conclusions regarding the penalty assessment were recorded by him in a letter to TSC dated 11 October 2004[35]
"It may be noted that for a taxpayer to intentionally disregard the ITAA or the regulations requires the taxpayer to know what the obligations under the ITAA or regulations are, and to choose to disregard them."
Mr Folland made reference to this passage before dealing with the three separate areas of shortfall.
134. In relation to the first area, involving Australian residents being treated as non-residents because they signed up as members of TSC on the Internet, Mr Folland said:
- "53) All playing fees and other membership fees received, (regardless of if they were received for TSC2000 Pty Ltd or {as contended by you} received by TSC2000 Corporation) have been dealt with, recorded, managed and banked by TSC2000 Pty Ltd.
- 54) You have actively sought advice from a registered tax agent on how to minimise your exposure to GST. Having received this advice you have chosen to ignore it.
- 55) You received advice in a letter from KPMG on 22 May 2000 (Paragraph 21 above at items a) to k)) that fees charged to Australian residents will attract GST. The assessability of the full amount of playing fees received from Australian residents was at no time unclear, you had received clear advice that this would be a taxable supply.
- 56) By establishing the incorporated entity in Vanuatu and failing to follow the advice that was given to you identifying that that the manner in which you eventually reported your GST obligations was not in accordance with the GST legislation you have intentionally disregard the GST Act. You were made aware that GST would be applicable to the transactions involving the Vanuatu based entity yet chose to disregard this. This act can only be seen as an intentional one.
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57) You were aware of the fact that the majority of members included in your calculation of international members were Australian residents. This is inferred from the fact that your sole director and shareholder Michael Kuhne,
- a) has intimate knowledge of the operation and make up of the member database, where members addresses are displayed,
- b) has included as international, memberships that he himself and other family members who reside in Australia have maintained with TSC2000 Pty Ltd.
- 58) You heavily promoted members joining up via the internet, however, the TSC2000 Pty Ltd website in Australia redirected all new members to the TSC2000 Corporation website. This meant that all members signing up via the internet, regardless of residency, were being classified as non-residents. The fact that there is no facility for members to sign up on the internet via TSC2000 Pty Ltd directly supports the view that this was an attempt by you to avoid paying GST on the supplies you made to these individuals. Despite being told of the taxable status of supplies made to Australian residents, you have treated Australian residents as non-residents.
- 59) The disproportionate increase in international membership percentages supports this.
- 60) You used this same method of classification of members in reporting the income received for other membership services, and these have also been understated.
- 61) You were aware that Australian residents were joining via the TSC2000 Corporation website and even included the following in the terms and conditions for the Website Application for TSC2000 Corporation at item 2.9:
'If you are an Australian resident and you wish to use the direct debit bank system, you must pay the Initial Fee for Club Membership by Australia Post Money Order or Bank cheque made payable to 'TSC2000 Corporation''.
- 62) The fact that you received advice that playing fees received from Australian resident members would be a taxable supply, and acknowledged (as shown above in the terms and conditions) that Australian residents were joining via the TSC Corporation website, yet failed to attribute the supplies made to these members, identifies and intentional decision made by you to ignore the GST Act and the advice you received."
135. Mr Folland concluded that in the case of this shortfall there had been intentional disregard of a taxation law warranting a 75% base penalty.
136. He then considered the shortfall resulting from the failure to report the whole amount of the gambling supply. His reasoning for concluding that there had been intentional disregard was expressed in this way:
- "63) The evidence supports that you knew your taxation obligations, and you chose to disregard them. In a letter of advice from your accountant (KPMG) dated the 22 May 2000, you received advice that the supply that you were making was a wholly taxable supply under the GST Act (Paragraph 21 above at items a) to k)).
- 64) The advice stated that a number of changes would need to be implemented to pursue the issue of paying GST only in its administration fee. This is your professional advisor's statement that the $12.50 playing fees charged by the club is a wholly taxable amount at the time the advice was given. Your advisors made you aware that the supply you were making was a wholly taxable one. They also identified the difficulties you would have in attempting to argue otherwise.
- 65) Although advice was given on how your advisors believed you could successfully argue that GST was only payable on the administration fee (you therefore were aware how the law applied to your situation), the recommendations were not implemented by you and resulted in a tax shortfall.
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66) Your behaviour in failing to report the supplies as wholly taxable after receiving professional advice to the contrary is, therefore, the intentional disregard of a taxation law, the application of which you were fully aware."
137. It is necessary, finally, to have regard to Mr Folland's evidence in the course of cross-examination. Having referred to the letter of 14 May 2000, Mr Robertson asked:
"… you're not saying, are you, that KPMG advised back in May 2000 that the law on this area on the consideration point is that it's a gambling supply and you've got to calculate it under Division 126?"
Mr Folland said, "No, I'm not saying that." The cross-examination then continued:
"Do you accept that KPMG didn't hold that belief? - Yes.
And you accept that the applicant didn't also hold the belief that it was a Division 126 gambling supply? - Yes."
138. On the basis of this passage of evidence, Mr Robertson submitted that, at the time when Mr Folland undertook the assessment of penalty, he had no belief that there had been an intentional disregard of the GST law. The submission was put in this way[37]
"Mr Folland's penalty assessment was that the applicant had made false or misleading statements for 11 tax periods that resulted in tax shortfalls because the statements were not prepared in accordance with Division 126 of the GST Act. He asserted that part of these shortfalls resulted from intentional disregard of the GST law by the applicant.
But at that time Mr Folland admitted that it was not his view that the applicant believed that the GST law was as had been assessed by the respondent under Div 126. He was fixated upon a KPMG letter of May 2000, which he agreed did not express the view of the GST Act that the applicant was supposed to have intentionally disregarded.
Accordingly, this is not a case of Mr Folland being genuinely wrong about the KPMG letter and later corrected. He knew that that letter did not express the view of the GST law that he is said the applicant disregarded but nevertheless issued an assessment contrary to his belief.
Mr Folland is not to be believed when he says that he was unaware of the view of the law that KPMG and the applicant held when they lodged the BASs. The ATO team leader - Ms Camden - had no trouble in accepting what was KPMG's view of the law, nor that it was agreed to by the applicant, throughout the ATO investigation. Mr Folland was involved with that audit, and had handed over all the files to him.
So, in fact, Mr Folland did not hold any belief that the applicant intentionally disregarded the GST law. The Tribunal should find that he knew that KPMG's consistent interpretation, apart from their freely admitted error in respect of the $0.40 component, was the interpretation he claimed only to have been informed about in late 2003.
A taxpayer cannot intentionally disregard something that it does not consider to be correct. This error is of such a character that the penalty assessment is unarguably bad."
139. On this basis it is said that the penalty assessment was void because it was not a bona fide assessment and was invalid because of an error of law on the part of Mr Folland. And under either basis the only available conclusion was that TSC's objection was to be allowed without the Tribunal, in effect, re-considering the correct or preferable decision.
140. The correctness of the legal conclusions asserted by TSC are open to doubt[38]
141. First, I note that the passage from cross-examination on which particular reliance is placed was not directed to Mr Folland's beliefs at the time of his assessment; the question seems to have been directed to his view at the time of the hearing about the beliefs of TSC and its accountants. But even if the passage of evidence is to be read as indicating that, at the time of undertaking the assessment of
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administrative penalties, Mr Folland was of the view that neither TSC nor its accountants had the view that the payment of the weekly fee amounted to a gambling supply under Division 126, that does not make out the wider proposition that Mr Folland "did not hold any belief that [TSC] intentionally disregarded the GST law."142. Mr Folland's views about his relevant beliefs were set out contemporaneously in his letter of 11 October 2004. His belief was that TSC had been advised by KPMG's letter of 22 May 2000 that the supply being made was a wholly taxable supply, that changes were required to ensure that only the administration fee component was liable to GST, and that those changes were not effected. But the key lies in Mr Folland's view that the accountant's letter advised "that the supply was a wholly taxable supply under the GST Act[39]
143. As it happens, I do not regard Mr Folland's view as being a correct interpretation of the letter of 22 May 2000 but Mr Folland's view was that TSC had been told that it was liable to GST on the whole amount of the weekly fee. On Mr Folland's approach it was not necessary to have regard to the basis of the accountants' view, it was enough that he took the view that the advice given to TSC's was that, absent the changes recommended, TSC was liable to GST on the whole amount. The fact that Mr Folland's view was erroneous (as I conclude) does not have the conclusion that he had no view and that his assessment was either void or invalid. This means that I need consider the matter afresh, that is, to undertake merits review and reach my own conclusions on what penalty, if any, should be imposed.
144. I propose to do so on the basis of separating the shortfalls in the manner identified by Mr Folland.
145. I should start by observing that I do not place any particular weight upon the evidence now given by various witnesses for TSC as to their state of knowledge of the operation of the GST Act and similar matters at the relevant times. In saying that, I do not intend any criticism of them; rather I consider it to be unrealistic to think that witnesses could now recall their thinking at points in time up to seven years earlier, a fortiori where events since then involving the Commissioner's processes are likely to have added further confusion to their thoughts. It is a better approach to proceed upon the basis that the letter of 22 May 2000 from KPMG informed the views of TSC, and in particular, Mr Kuhne.
146. The first shortfall identified by Mr Folland was that which arose from TSC treating all supplies to members who joined via the Internet as being supplies to non-residents and thus not liable to GST. The liability to GST in such circumstances was the subject of explicit advice in the 22 May 2000 letter in these terms:
"Therefore, the services provided by the international company are directly connected with Australia only by the fact that its administration charge is used to procure services from an Australian company. However, the end usage of this service is enjoyed outside of Australia and therefore fees charged to non-resident members for this service should not be subject to GST. Where the international company has Australian resident members, GST will be applicable to fees charged by the company to those members " [emphasis added].
In the "Executive Summary" at the beginning of the letter, KPMG had expressed the view that transactions "between the international operations and non-resident members will not be subject to GST".
147. In my view, the only reasonable interpretation of these parts of the letter is that the opinion of KPMG conveyed to TSC was that GST was payable in respect of fees charged to Australian resident members who signed up with Corporation. But, as Mr Kuhne agreed[40]
148. In circumstances where TSC had advice that GST was payable in respect of Australian resident members of Corporation but made no differentiation in its accounts and in its BAS between the categories of members, it is necessary to give serious consideration to the question of whether TSC's actions in compiling
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its BAS on that basis represented, to that extent, intentional disregard.149. Not without hesitation I have come to the view that TSC's treatment on monies received from members in this way should be treated as reckless, rather than as amounting to intentional disregard. I reach that view on the basis that I consider it more likely that TSC, and particularly Mr Kuhne, displayed gross recklessness rather than calculated disregard. Mr Kuhne is, no doubt, a clever man in his field but he did not strike me as someone who had an eye for the complexities of tax law. He may well have received and read the 22 May 2000 letter from KPMG but I very much doubt that he comprehended its contents. The introduction of GST seems to have coincided with a very great increase in the business of TSC and increasing tensions between TSC and the QOGR and Golden Casket. In my view, the most likely explanation is that Mr Kuhne, and thus TSC, was distracted by the everyday business of TSC and was indifferent to matters of tax compliance.
150. It is also relevant that I consider, for reasons discussed below, that the perceived wisdom within TSC was that its liability to pay GST was limited to a small portion of the weekly fee.
151. The next category of shortfall relates to the general treatment of the $12.50 amounts. The view adopted by TSC was that it was only the administration fee component and the undistributed bonus components that were liable to GST. It seems to be accepted that KPMG initially held the view that the merchant fee component was GST-free but that subsequently the Commissioner advised that his view, which TSC and KPMG accepted, was that these amounts were liable to GST.
152. The larger question here is whether TSC intentionally disregarded the obligation to pay GST. I am unable to conclude from the 22 May 2000 letter that TSC was advised that GST was payable on the whole of the weekly fee unless the charges suggested in the letter were effected. Rather, it seems to me, that the letter has assumed that aspect without deciding it. In its advice, under the heading "Background", KPMG wrote:
"The domestic operations for The Syndicate Club Pty Ltd will be charging a playing fee of $12.50 per week to its members to participate in the lotto syndicates organised by the club. Of this $12.50 fee only $1.20 relates to services provided by the club itself, with the remaining $11.30 consisting of the following:
Purchase of lotto tickets $2.70 Credit card fees $0.30 Member bonuses $8.30 It has been put forward that the above amounts do not relate to a service provided by the club but rather have been incurred by the club in an agency capacity on behalf of its members and GST should not be imposed on the revenue received by the club for these amounts."
153. The letter is also noteworthy for its absence of any reference to Division 126. I do not intend any criticism of KPMG in saying that; there was an enormous volume of new legislation that needed to be digested by professional advisers at that time. But the absence of any reference to Division 126 and the last paragraph of the extract set out above lead me to conclude that TSC did not, at any time, have a particularly clear view of the GST obligations imposed upon it by the GST Act. It is not clear whether this agency notion referred to by KPMG was put forward by Mr Higgs, although this seems likely. But KPMG seem to have accepted the idea as a given and was not asked to consider the correctness of the assumption.
154. Thus, I am satisfied that TSC's conduct did not involve intentional disregard. TSC did not have sufficient comprehension of its obligations to allow a conclusion to be drawn that it intentionally disregarded those obligations. There is an attractive (but erroneous) simplicity to the untutored mind about the notion that TSC was a mere conduit for amounts used to purchase Lotto tickets and pay bonuses to members.
155. In reaching that conclusion I also consider that Mr Kuhne was a mathematician and computer analyst. He had no qualifications or experience in bookkeeping or accounting but was in charge of a business that was growing
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exponentially at the time of the introduction of GST.156. The question then arises as to how TSC's conduct should be characterised - did it amount to recklessness, warranting a penalty of 50%, or a failure to exercise reasonable care, warranting a penalty of 25%.
157. The interplay between these two concepts, in the context of cognate provisions in the Income Tax Assessment Act 1936, was considered by the Full Federal Court in
Hart v Commissioner of Taxation[41]
"[43] Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective. In BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347 at 364 Cooper J made the following observations in relation to recklessness in the context of s 226H:
'Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.'
[44] There is a line between recklessness and dishonesty, and as the Explanatory Memorandum for the Taxation Laws Amendment (Self Assessment Bill 1992 (Cth) (at p 98) confirms, a finding of dishonesty is not necessary for a taxpayer to be subject to a s 226H penalty. Wherever a tax return includes deductions that are not allowable, a foreseeable consequence is that there will be a tax shortfall, particularly in a system of self assessment. But, in the ordinary case, the mere fact that a tax return includes a deduction which is not allowable is not of itself sufficient to expose the taxpayer to a penalty. Negligence, at least must be established although there are some sections (eg s 226K) which impose a liability in particular circumstances even if the taxpayer has not been negligent. The context makes it clear that recklessness means something more than failure to exercise reasonable care (s 226G), but less than an intentional disregard of the Act (s 226J)[42]
131 FCR at p. 214 per Hill and Hely JJ. .
158. In circumstances where it is not shown that Mr Kuhne ever sought advice on the impact of GST on TSC's operation and where I infer he simply did not turn his mind to the question it seems to me that I must conclude that TSC was reckless in lodging its GST returns on the basis that Lotto ticket costs and bonuses paid to members were not liable to GST. It is not sufficient to say that that was the view of KPMG; the evidence does not satisfy me that KPMG even provided advice to that effect. The evidence of Mr Van Harwaarde[43]
159. I reach that conclusion notwithstanding Mr Kuhne's evidence[44]
160. But there is a further matter that leads me to that conclusion and that is the absence of evidence of any steps taken to give effect to KPMG's conclusions in the letter of 22 May 2000. The recommendations contained the
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letter[45]161. The third category of shortfall arose as a result of failing to report other supplies. The background to this shortfall, from the Commissioner's perspective, is set out in Mr Folland's penalty assessment[46]
162. I am not satisfied that TSC has discharged its onus of showing that the assessment was, in this regard, excessive.
163. The same is true in relation to the other aspect of the shortfall, that arising from overstated GST paid on creditable acquisitions. No explanation has been proffered and no attempt was made to controvert the figures used by the Commissioner.
164. In these circumstances, subject to the separate issue of remission under s 298-20 of the TAA, the assessment of administrative penalty ought be undertaken on the basis that the entirety of the shortfall amount resulted from recklessness on the part of TSC.
165. It is now necessary to deal with the question of remission under s 298-20 of the TAA. Mr Folland considered the discretion to remit in the course of making the penalty assessment. He determined to exercise the discretion to remit, at least in relation to the first year of operation of GST. TSC submits that the discretion under s 298-20 is before me. The Commissioner submits that it is not because there was no objection that seeks to engage a remission decision.
166. TSC's objection to the penalty assessment was dated 10 December 2004. It said, in part:
"… this objection deals only with the assessment of penalties on the shortfall amount. We note that this objection is not seeking any remission of penalties and we reserve the right to seek such remission in the event that this objection is wholly or partially unsuccessful."
The objection was wholly unsuccessful but, so far as I am aware, no attempt was made to "seek such remission" until TSC lodged its Statement of Facts Issues and Contentions in the Tribunal. Paragraph 230 of that document said:
"The applicant has not been compensated for the respondent's improper conduct in dealing with its affairs. If any penalties remain, it is appropriate that they be remitted under s 298-20 of Schedule 1 to the TAA as some small compensation."
167. The Commissioner's response was to rely upon the earlier statement by KPMG.
168. When the question of remission under s 298-20 of the TAA was expressly raised in TSC's written submissions[47]
169. Whilst I accept that the Commissioner is correct, it seems to me that I should regard TSC's submissions as being an application to add to its grounds of objection a ground engaging the general discretion to remit under s 298-20 of the TAA. To require TSC to seek a separate consideration of the discretion and a separate review if the decision were unfavourable does not seem to be a proper use of public and private resources in this Tribunal that has a statutory objective of providing a mechanism of review that is fair, just, economical, informal and quick.
170. There is no suggestion on the Commissioner's side that he would be prejudiced were I to consider the s 298-20 discretion; his objection is entirely technical.
171. In considering the issue of remission I propose to have regard to the policy material contained in PSLA 2000/9, PSLA 2002/8 and PSLA 2006/2.
172. In relation to the first year of operation of GST it is appropriate and consistent with the approach in PSLA 2000/9 that the penalties imposed in that year be remitted in full. On the findings I have made TSC was reckless. However, as against that, the introduction of
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GST coincided with the sudden growth in Oz Power such that, charitably viewed, TSC was perhaps over whelmed in that year.173. I would not regard it as proper to remit the penalties imposed in the second year, i.e., the year ending 30 June 2002. Paragraph 5 of PSLA 2002/8 suggests that penalties should not be remitted where a taxpayer has "recklessly approached their tax obligations." Independently of that policy statement I would have reached the same view. More than 12 months after the introduction of GST, TSC ought to have its affairs in much better order.
174. For the same reason I would not exercise a discretion favourably to TSC in the third year, i.e., the year ending 30 June 2003. The shortfalls in that year were not the result of isolated errors or extraordinary events; they were the product of systematic failures that amounted to recklessness on TSC's part.
175. In the result I conclude that:
- (i) penalties in each BAS period from 1 July 2000 to 30 June 2003 should be imposed at the rate of 50% on the basis of recklessness;
- (j) penalties in the year ending 30 June 2001 should be remitted pursuant to s 298-20 of the TAA.
176. The next argument that TSC advances is that Mr Folland "failed to apply properly" s 284-215(2) of the TAA. I do not regard the factual assumption of this proposition as having been established but even if it were it would not have the consequence contended for by TSC; it means no more than I am obliged to consider whether the sub-section has application. I do not consider that it does.
177. The sub-section would have application, and TSC would not have a shortfall amount as a result of a false or misleading statement, to the extent that it and KPMG took reasonable care in making the statement. I do not consider that it did take reasonable care and I take that view because TSC is not shown ever to have sought an informed advice on the operation of the GST Act generally and Division 126 of that Act in particular. Moreover, to the limited extent that TSC obtained advice from KPMG it appears not to have acted upon that advice.
178. The final argument for TSC was that penalties should be reduced by operation of s 284-225 of TAA and, in particular, sub-section (2). The argument was put in this way:
- • TSC, via KPMG, had a view of the GST law and how it proposed to treat its various receipts for GST purposes;
- • KPMG informed Ms Camden, one of the Commissioner's auditors, of that view and how it proposed to treat the receipts;
- • thus, the argument goes, the Division 284 penalty regime does not apply where TSC has informed the Commissioner what its position is. Any GST shortfall is not as a result of the statement and there can be no false or misleading statement because the statement to the Commissioner is the BAS coupled with the oral explanation to Ms Camden of how TSC, by KPMG, regarded the GST law as applying.
179. In subsequent written submissions[49]
"then a reasonable advisor would have taken the prudent step, well known to tax advisors, of causing the BASs to be lodged in accordance with the ATO view so there could be no possible tax shortfall. …
Accordingly, KPMG's statement to Ms Camden, fairly considered in full in accordance with Jack v Smart [(1905) 2 CLR 684], for each tax period following the commencement of her investigations, were not false or misleading to her in any way. And given the actions a reasonable advisor would take if informed of a significant ATO contrary view, the Tribunal should conclude that any tax shortfall was a result of the respondent's decision to stand by while the BASs were lodged and not inform KPMG that the respondent considered them to be incorrect."
180. In my view this argument fails on a number of levels.
181. First, I would not be prepared to infer from the evidence, that TSC would have instructed KPMG to act in the way suggested, a fortiori where TSC put on no evidence on the point, did not raise it as an issue in a Statement of Facts, Issues and Contentions, and the point
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was raised after all the evidence had been concluded.182. But beyond that, I consider that the submission puts a gloss on the statute that is not warranted. Division 284 operates on the basis that a liability for administrative penalty arises where a taxpayer has a shortfall as a result of a materially false statement made to the Commissioner.
183. Here, in each BAS return, TSC made a statement to the Commissioner about the level of its income liable to GST and its creditable acquisitions. On the view I take of the matter, the statements about the level of income liable the GST were misleading. The liability for GST assessed on the basis of those statements is less than it would be if the "true" figures had been returned. The shortfall was as a result of the statement.
184. The point that TSC makes, were it made out on the facts, would go to the general discretion under s 298-20 of the TAA. It is possible to conceive of a situation where what, in another context, would be regarded as a waiver might arise but where s 284-215(1) of the TAA did not operate because advice was not given. This is not such a case.
185. I accept the unchallenged evidence of Ms Camden that she did not ever endorse the accounting treatment adopted by TSC. She was, understandably, vague about the precise content of her discussions with either TSC or KPMG about her views about the appropriate treatment of member's fees. Her affidavit details a lengthy and complex investigation where she was never able to reconcile the information provided to her. In the circumstances she describes I could not conclude that at any relevant time Ms Camden had a sufficiently clear view of the way in which TSC was treating its receipts, which might raise an obligation on her, as the Commissioner's representative, to point out that the Commissioner had a contrary view. Nor does the evidence enable me to reach any view on the point in time when Ms Camden became aware of what the Commissioner's views on the matter were.
186. There is, in my opinion, nothing in this argument.
Conclusions
187. It follows that I would:
- (k) affirm the Commissioner's objection decision disallowing in full the applicant's objection dated 29 September 2004 to the assessments of GST issued 6 April 2004;
- (l) set aside the Commissioner's objection decision disallowing in full the applicant's objection dated 10 December 2004 to the assessment of administrative penalties issued 11 October 2004,'
- (m) remit the matter to the Commissioner for assessment of administrative penalties on the basis that;
- (i) the applicant's shortfalls resulted from recklessness
- (ii) no increase under s 284-220 of the TAA and no reduction under s 284-225 of the TAA is warranted
- (iii) penalties in respect of each of the quarters ending 30 September 2000, 31 December 2000, 31 March 2001 and 30 June 2001 be remitted in full.
- (n) certify that the proceedings have terminated in a manner favourable to the applicant.
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