• The impact of this case on ATO policy is discussed in Decision Impact Statement: VCF and Commissioner of Taxation (Published 4 September 2009).

CASE 5/2008

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2008] AATA 731

GL McDonald (Deputy President)

The application

1. The applicant is appealing against a decision of the Commissioner of Taxation disallowing tax credit inputs for the period 1 July 2000 to 31 October 2002 and the imposition of a 75% penalty. Originally there were several issues between the parties but the issues stated below are all that concerns the Tribunal in this case.

The hearing

2. The Tribunal had before it the documents filed for purposes of s 37 of the Administrative Appeals Tribunal Act 1975 (the T documents). Oral evidence was given on behalf of the applicant by the current managing director of the company which took over the applicant. The managing director was a director of the applicant at the relevant time covering the disputed assessments. On behalf of the respondent Mr Matthew Lonsdale, a taxation officer engaged in the audit of the applicant's tax affairs, gave oral evidence. Oral submissions were made after the conclusion of the evidence and subsequent written submissions addressed the proposition of the methodology the Tribunal should adopt to calculate the amount for assessment if it found that the primary tax should not be reduced.

3. In these reasons for the sake of convenience unless otherwise indicated the Tribunal will refer to the applicant as encompassing its then corporate structure.

The background

4. The applicant was a company engaged in the purchase, processing and sale of scrap metal including silver, copper, brass, zinc, aluminium, stainless steel, and titanium.^[1] Transcript, 22 May 2008, page 15. As at 1 July 2000, it had scrap metal yards in four states. The operation was carried out in different locations under various business names. At 1 July 2000 the three directors of the applicant, including the managing director, were also its shareholders. All three directors were actively engaged in the business. The managing director bought out the other shareholders but he was unable to recall when this occurred.^[2] Transcript, 22 May 2008, page 15.

5. On 1 July 2000 A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) came into operation. At the time the GST was introduced the applicant was unaware that it could claim input tax credits for scrap metal sold to it from individuals. Such sales are termed "door trade" by the applicant.^[3] Transcript, 22 May 2008, page 15. Door trade is distinguished from sales of metals made to the applicant by businesses or industrial suppliers where the seller has an ABN number. It was the managing director's evidence that door trades were conducted on at least three of the four sites operated by the applicant.^[4] Exhibit A1, paragraphs 3-4 and Transcript, 22 May 2008, page 16. A subsequent audit conducted by the respondent covering the relevant period established door trades occurred at five sites.^[5] Exhibit R1, paragraph 27. Payments made by the applicant for the purchase of scrap metal for door trade were made in cash.

6. The applicant became aware that an input tax credit claim could be made when it changed tax advisers in November 2001. The applicant claimed a rebate for the period 1 July 2000 to 30 November 2001 (the first period) and commenced in February 2002 filing quarterly returns for the period 30 November 2001 to 31 October 2002 (the second period).

The evidence

7. The managing director told the Tribunal that he had been involved with the scrap metal business for about 15 years.^[6] Transcript, 22 May 2008, page 12. The company of which he is currently the managing director, which acquired the applicant in 2007, has a turnover of $400 million and a staff of about 600 employees.^[7] Transcript, 22 May 2008, page 13. The managing director estimated the company to be currently within the top 10 largest scrap metal dealers in Australia out of approximately 30 or 40 operators. However the managing director stated he would not describe himself, or his company, as a leader in the scrap metal industry.^[8] Transcript, 22 May 2008, page 13.

8. It was the managing director's evidence that he contacted the Australian Taxation Office (ATO) by telephone regarding the introduction of the GST to ascertain how it would affect the applicant in its business.^[9] Transcript, 22 May 2008, page 40 and Exhibit A1, paragraph 6. This presumably occurred at or about the time the GST Act was introduced in 2000. He claims he was advised by an officer of the ATO to record all incoming door trade transactions.^[10] Exhibit A1, paragraph 6. He received this advice before he was aware of the ability to claim an input tax credit in the circumstances outlined later in these reasons.

9. The managing director said that the applicant had records noting transactions as part of its business records. He commenced a system of recording on what were called 'purchase documents' the name and address of the door trader, the type, quantity (weight) of scrap metal, the date, and price the applicant paid for the scrap.^[11] Exhibit R1, paragraph 12 and Transcript, 22 May 2008, page 19. On some occasions the vehicle registration number of the seller was also recorded. That information was collected by the employee on duty at the time the seller attended the applicant's yard. The information was subsequently transcribed to a computer.

10. It was the managing director's evidence that the information was important to enable analysis, for example to check the growth of the business, to identify the industrial sellers and for use as a stock control mechanism.^[12] Transcript, 22 May 2008, pages 20-21. The managing director agreed that the information collected concerning door trades during the first period was not used for any purpose.^[13] Transcript, 22 May 2008, page 22. Clearly in a competitive market, where the object is to acquire scrap metal for resale, a business has an incentive in both attracting and maintaining supply. The applicant's accountants wrote to the ATO on 26 November 2004 stating among other things that "[the applicant's] employees in the past operated on the basis of never rejecting a customer."^[14] T documents, T18, page 168(b). However, the managing director denied that advice given by the accountants and denied that the applicant had an incentive in ensuring the information provided by door traders was inaccurate because to do otherwise would, or would have been likely to, lead to a diminution in door trade business.^[15] Transcript, 22 May 2008, page 22.

11. The managing director denied that the door trade business constituted a significant part of the overall operation of the applicant.^[16] Transcript, 22 May 2008, page 17. He also maintained that the applicant's business was then a small business. The managing director was unable to give an estimate of the applicant's turnover in the 2000 and 2001 tax years.

12. It was claimed in correspondence from the applicant's accountants that the record keeping covering the first and early part of the second period was not up to the required standard.^[17] T documents, T18, page 166. While the managing director did not agree that there was no checking required as part of the system implemented as to the accuracy of the information provided by door traders during this time, for example no confirmation of identity was required by reference to a driver's licence,^[18] Transcript, 22 May 2008, page 26. there was no evidence that checking was part of the system. Further the applicant's accountants confirmed in their letter of 26 November 2004 that there was requirement to confirm the name or address of the door trader.^[19] T documents, T18, page 168(b).

13. The managing director was uncertain about when and what changes were made to the applicant's record keeping procedures. At one point he stated that its procedures and record keeping were changed in May 2002 once information came from the ATO about what would be required.^[20] Exhibit A1, paragraph 17(a). At another point he thought the changes were introduced following the accounts appointment in December 2001.^[21] Transcript, 22 May 2008, page 28. The applicant's advisers, in a letter to the ATO dated 26 November 2004, claimed improvements to the applicant's record keeping were implemented from December 2001.^[22] T documents, T18, page 166. It was unclear exactly what measures were introduced and when in the post December 2001 period to improve the record keeping, but it may have been that initially the recording of the vehicle registration numbers of the door traders was implemented. It was the evidence of the managing director that from May 2002 prominent signs were displayed at the applicant's sites 'informing and educating' door traders about the need for compliance and the applicant's purchasing staff were brought up to date with the requirements.^[23] Exhibit A1, paragraph 17(b)-(c).

14. The managing director claimed that during both periods there were no general publicly available procedures or guidelines issued by the ATO on the expected GST record keeping requirements. According to the managing director ATO guidelines were issued in October 2003.^[24] Exhibit A1, paragraph 19. Industry forums organised by the ATO with the scrap metal industry were held commencing in May 2002.^[25] Exhibit A1, paragraph 15. It was not until attending an industry forum conducted by the ATO in 2004^[26] Transcript, 22 May 2008, page 18. that the managing director claimed to become aware of "… the prevalence of the practice of suppliers [door traders] providing false identifying information to dealers [scrap metal dealers]."^[27] Exhibit A1, paragraph 15. The managing director emphatically denied that he was aware tradesmen involved in door trading with the applicant were giving false identity information in order to avoid detection for the purpose of evading the payment if income tax, until this was brought to his attention at the forum held in 2004.^[28] Transcript, 22 May 2008, page 27.

15. The managing director stated that the applicant first became aware that tax input credits could be claimed when it changed accountants in November 2001.^[29] Exhibit A1, paragraph 10 and Transcript, 22 May 2008, page 30. An amended tax return for the first period and BAS returns for the second period were then lodged.^[30] Exhibit A1, paragraph 11. In October 2002, after a request from the applicant, the respondent undertook an audit of the applicant's business.

16. The respondent sampled a number of the records of the information contained on the purchase documents held by the applicant. As the result of an analysis of the sample it was determined that a more detailed investigation would be carried out. At the conclusion of the audit the respondent notified the applicant that there were "… significant inconsistencies of in the identification of suppliers. These inconsistencies are in the names, addresses and motor vehicle registrations. In addition … there were significant instances of supplies as stated on the invoice that did not take place."^[31] T documents, T4, page 87. The results were extrapolated and the respondent claimed that 90% of the door trades involving amounts of over $300 were false.^[32] T documents, T4, page 88. The Tribunal takes this to refer to the information provided by the door traders. Adjustments disallowing claims for $494,402 for the first period and $564,130 for the second period were issued. In addition to the general rate of interest penalties of 75% were imposed.

The legislation

17. Part 4-2 of the GST Act deals with "second hand goods". Section 66-5(1) of the GST Act relevantly provides:

"If you acquire second-hand goods for the purposes of sale or exchange (but not for manufacture) in the ordinary course of *business, the fact that the supply of the goods to you is not a taxable supply does not stop the acquisition being a creditable acquisition."

18. Section 66-10 sets out the amount claimable of input tax credits for creditable acquisitions.

19. Section 66-17(2) requires a claimant to record of the following;

• "(a) set out the name and address of the entity that supplied the goods to you; and
• (b) describe the goods (including their quantity); and
• (c) set out the date of, and the consideration for, the acquisition."

The Taxation Administration Act 1953 provides for the imposition of charges and penalties. These are set out below in the section of the reasons dealing with penalty.

The initial testing and the audit

20. The identification details of 1513 door traders as recorded on the purchase documents were investigated across five sites that the applicant operated.^[33] Exhibit R1, paragraph 27. Initial information was collected by analysing the information provided by the applicant followed by visits to 148 traders' addresses.^[34] Exhibit R1, paragraph 19.

21. As part of the initial testing 171 motor vehicle registrations recorded were checked for one of the Victorian sites. It was found that 168 vehicles were not registered with the Victorian TAC.^[35] Exhibit R1, paragraph 22(b). In cross examination Mr Lonsdale conceded that no account was taken of the possibility that any of the vehicles may have been registered interstate.^[36] Transcript, 22 May 2008, page 60. While this may be so it would not, in the opinion of the Tribunal, be likely to be of such magnitude that even if the one interstate registered vehicle had been used to make several deposits it would cause any major distortion to the records.

22. Other information was considered suspect because it was claimed that the type of vehicle used was incapable of hauling the weight of metal recorded as being sold. In two cases tractors were recorded as depositing metal scrap. However, as became apparent in cross examination of Mr Lonsdale no account was taken of the possibility of trailers being used - a detail which would not appear on the purchase document even if the vehicle registration was recorded. Accordingly this aspect of the reasoning holds little persuasive weight.^[37] Transcript, 22 May 2008, page 60.

23. Nevertheless, there remains the evidence that one deregistered vehicle was used by eight differently named people and another by four differently named people to sell scrap metal. Another vehicle with a one digit change in the number plate (from an eight to a six) and with a different address in the same street and suburb but with different people recorded as being the traders, deposited exactly the same weight and type of metal two weeks apart.^[38] Exhibit R1, paragraph 22(b). In both instances the evidence is such that it gives rise to a reasonable suspicion that, at the very least, an attempt was being made by some traders to provide false information.

24. The respondent noted that the repeated use of the same first name when combined with other factors such as the use of differing surnames, addresses and vehicles but trading in quantities of the one metal, consistent with it being a commercial quantity, gave rise to suspicion. This was confirmed when a tax officer was informed by an employee of the respondent that the applicant knew the identity of the person but provided no details as to his/her identity.^[39] Exhibit R1, paragraphs 22(d) and 23-25.

25. The respondent decided that there was sufficient information from the sample for a more detailed investigation to proceed. The respondent then generated a number of randomly selected purchase documents proportional to the total number of door trade purchase documents generated at each of the five sites covering the first and second periods. In total 1513 from a maximum of 17,567 were selected.^[40] Exhibit R1, paragraph 27. It was Mr Lonsdale's evidence that he was originally instructed to sample 90 of the purchase documents. After making inquiries on the internet about sample sizes Mr Lonsdale decided that the proposed sample of 90 was too small to be meaningful and increased it to 1513.^[41] Transcript, 22 May 2008, pages 65-66. He stated once a sample size of over 8% was reached the results returned would be considered accurate^[42] Transcript, 22 May 2008, page 66. to within 95%.^[43] Transcript, 22 May 2008, page 66 and Exhibit R1, paragraph 27.

26. The methodology that was employed is set out in detail in Mr Lonsdale's statement.^[44] Exhibit R1, paragraphs 28-34. It involved cross checking information of the name and address recorded by the applicant on the purchase documents against records available to the respondent. In cases where information could not be confirmed the information contained on the purchase document was accepted as being accurate.^[45] Exhibit R1, paragraph 34(a). Some of the records checked were publicly available, for example telephone books and electoral rolls, and some were not, for example information from individuals' tax files.

27. In 479 cases where the name and address of the trader indicated a telephone number that number was called.^[46] Exhibit R1, paragraph 32. If the individual confirmed he/she had sold scrap metal to the applicant at or about the time disclosed then that was recorded as a legitimate identity.

28. Where the response was that no one of the name given lived at the address at or about the time of the transaction further enquires were made from the person who answered the telephone. Where the name on the docket could not be verified or a named person denied supplying the scrap metal, or the premises were visited and found not to exist, the information was recorded as being false. Mr Lonsdale conceded that there was no cross checking to ensure that the answers given by the person answering the telephone were accurate.^[47] Transcript, 22 May 2008, pages 58-59. This represents some difficulty as to the reliability of this aspect of the evidence. If, as is maintained by the respondent traders were attempting to avoid tax liability, even if they had provided correct details to the applicant they may have not confirmed those details on being contacted by the respondent, regardless of whether the person being telephoned knew or did not know it was the ATO making the enquiry. An example was highlighted in the case of one person who was contacted. While the person agreed he was the person named on the purchase document he denied he had conducted a door trade. No further checking was undertaken and the identity information on the purchase document was recorded as being false.^[48] Transcript, 22 May 2008, page 64. While the information was recorded as being false it may well have been that the person just did not want to reveal their identification in answer to the telephone enquiry.

29. Where addresses were physically checked and it was found no such addresses existed as that recorded on the purchase document, it is reasonable to conclude that the information on the document was falsely given, other than perhaps if a recording or transcription error had occurred.

Relevantly the results are represented in the following graph^[49] Exhibit R1, paragraph 35. :

The amount of cash paid for scrap metal from cars is dealt with separately in these reasons.

The method of calculation

30. Mr Lonsdale set out the method he used to calculate the assessment by reference to Site 5.^[50] Exhibit R1, paragraphs 38-45. The same methodology was used for each of the other four sites.

31. The total of sales for the first period of 1 July to 12 December 2001 was $107,066.^[51] Exhibit R1, paragraph 41. As a first step all transactions under $50, including where several items traded may have in total exceeded $50, were excluded on the basis that that since such small amounts are involved it is more likely that the identity information provided and recorded is accurate.^[52] Exhibit R1, paragraph 39. Sales recorded as coming from businesses (that is, where an ABN number was recorded) and sales over $1000 (on the basis that they were likely to be from a business) were also excluded.^[53] Exhibit R1, paragraph 40. Of the $34,273 remaining, $16,313 was found to have resulted from documents which recorded false identity details, that is 47.60%.^[54] Exhibit R1, paragraph 41. That percentage was then applied for each month over both periods to calculate the amount of input tax credit disallowed. Mr Lonsdale maintained that since input tax credits were calculated by reference to dollar amounts, this was the correct way to undertake the calculation.^[55] Exhibit R1, paragraph 44.

32. The applicant, in its written submission dated 13 June 2008, maintained that the calculation methodology used by the ATO was flawed because s 66-17 required the provision of information and that a method which would more accurately address the outcome would be to calculate the percentage of false records multiplied by the dollar value of the total purchases. Thus in the case of the Site 5, 131 of the total of 415 records sampled would result in the records being 31.57% inaccurate. The total $731,237 value of purchases from door traders divided by the total input tax credit claimable amounts to $66,476. It was submitted that 31.57% of the total claimable income tax credit should then be disallowed, that is $20,984. This then should be further discounted by 5% or 10% being the amount estimated by Mr Lonsdale as being the margin for error. It was submitted the same methodology should then be applied to the other sites.

33. The respondent in its reply, dated 26 June 2008, maintained that the correct methodology had been used. It was submitted that GST is payable on the value of the property acquired and that the invoices for higher values purchased are more likely to occur in the context of taxable supply to the applicant. The respondent highlighted that the applicant's methodology involves an assumption of there being an even distribution of the false invoices within each site. It was submitted that such an assumption is not warranted as it is likely that, in the context of selling metals to avoid income tax liability, that the greater value traded is more likely to accurately reflect the circumstances than would be reflected by an even distribution of the incorrectly provided information. The respondent maintained that the onus was on the applicant to establish that the identity information in accordance with s 66-17 had been provided, and that the proposal of an alternative method of calculating the credit input tax did not discharge that onus. The respondent also submitted that no allowance should be made for statistical error on the basis that no error has been demonstrated by the applicant, which carried the onus to do so.

34. Mr Lonsdale conceded that no allowance had been made for the 5% which the internet site he accessed advised was the likely margin for error.^[56] Transcript, 22 May 2008, page 66. Later in his oral evidence Mr Lonsdale accepted an estimate of the level of accuracy of the details he recorded as being between 90% and 95%.^[57] Transcript, 22 May 2008, page 73.

The submissions

35. The applicant disputes that the input tax credit should be assessed as nil, as the applicant has complied with the record keeping required by s 66-17(2) of the GST Act. It is claimed that the GST Act should be read in the context of it being "…a practical business tax imposed with respect to elements of commerce."^[58] Sterling Guardian Pty Ltd v Commissioner of Taxation 2005 ATC 4796 ; [2005] FCA 1166 per Stone J at paragraph 39. Additionally it is claimed that the applicant has no duty to check the accuracy of information given to it by door traders (suppliers) and that if a reasonable effort has been made by the applicant to record the information given, then it has fulfilled its obligation. It was submitted on behalf of the applicant that no one working for the applicant could have been able to detect whether false identities were being given. The information, it was submitted, could only be gathered in hindsight and not contemporaneously or prospectively. The applicant claimed that the relatively sophisticated methodology adopted by the respondent to ascertain the falsity of the information recorded on the purchase documents was not open to employees of the applicant when collecting the information. The applicant conceded that in the case of an obviously false name being given (for example, a name such as 'Mickey Mouse') then the applicant would have no legitimate claim. However, no such obviously false name had been used in the instant case and the applicant had no obligation to check further.

36. The applicant concedes, and it is obvious from the examples of the copies of the computerised records, that some mistakes in spelling the names of streets, suburbs and probably names have occurred.^[59] Transcript, 22 May 2008, page 36. Errors of this sort may have occurred when the details were originally recorded or when they were transcribed into the computer. There is no evidence before the Tribunal as to the extent of recording errors made or whether this affected the outcome in any significant way.

37. The applicant submitted that in 2000 the GST was a new form of tax for Australian business and its operation had not been fully appreciated by either taxpayers or the ATO.^[60] Transcript, 23 May 2008, page 94. There were no tax rulings or voluntary codes in place to guide businesses as to what was or may be required. The managing director said telephone enquiries he had made of the ATO had confirmed that no input tax credit could be claimed for sales of scrap metal bought from door traders. By implication therefore he had no obligation to ensure the accuracy of the identification details given by door traders at least for the first period.

38. The respondent submits that since the information as to identity is incorrect, there has not been compliance with s 66-17(2), that is the subsection should be read literally and consequently the provision of incorrect information amounts to non compliance. It is submitted that a reasonableness provision relating to the collection of the identity information ought not be read into s 66-17 as Parliament has not allowed in the legislation for such an approach.

The Tribunal determination

39. The requirement in s 66-17 assumes the provision of accurate identity information. There is little point to s 66-17 if the information provided transpires to be false. The section is designed to provide relief to purchasers of scrap metal from the sale to them by those not engaged in business. It is not intended to extend that relief to those who engage in the sale as part of their business activity. In order to qualify for the benefit the scrap metal purchaser must comply with the requirement of obtaining identity information. The obtaining of the benefit carries with it the concomitant duty to provide the identity details of the door trader. The reason is obvious. It is to ensure purchasers who conduct transactions arising in the course of the conducting of a business are not participating in tax avoidance. Clearly not every piece of information will be accurately recorded and mistakes are bound to occur. In the instant case the evidence, arising from the audit, establishes to the satisfaction of the Tribunal, that more than mere clerical error was involved in the provision of the information to the applicant.

40. The Tribunal is satisfied that the evidence demonstrates the managing director is an astute business man with a lengthy experience in the acquisition, treatment, and subsequent sale of scrap metals. He was engaged in a business which paid its door traders in cash. That is perfectly legal and understandable in the circumstances. He must be taken to have known that many people selling scrap metal were for instance tradesmen who acquired scrap metal as a consequence and in the course of the principal work in which they were engaged. The Tribunal accepts that the manner in which those door traders dealt with their income tax affairs was of no interest to, and not any business of, the applicant. The Tribunal also accepts that the managing director was not dealing directly with the door traders. The Tribunal also accepts that the applicant's staff who dealt with the door traders would not have been aware in the pre February 2002 period of the requirements to be provided with identity information in order for the applicant to claim a input tax credit. However the door trading transactions occurred in a context and not in a vacuum. The managing director must, given his long experience in the scrap metal industry and undoubted acumen, have appreciated the context.

41. It is inconceivable that in the business world for someone of the managing director's experience in the industry, over a lengthy period of time, to claim that he was totally unaware, until being informed at an ATO forum, that some door traders may not have been taking the opportunity of receiving a cash benefit without declaring the income resulting from the sale of scrap metal acquired as an incident of their principal occupation. The managing director acknowledged that the scrap metal industry was not known for its honesty.^[61] Transcript, 22 May 2008, page 38. As at July 2000 he would have to have been 'blind Freddy' not to have suspected that some, at least, of the door traders selling scrap metal to the applicant were highly likely to be doing so as part of a business without wishing to disclose their true identity and that this was associated with them not wanting to pay income tax on sales made to the applicant. The Tribunal does not accept that he was 'blind Freddy'.

42. As the result of the conclusion reached by the Tribunal while it may be that he first formally heard of the practice when he attended a seminar organised by the ATO in 2004, he must be taken to have been highly suspicious of the practice occurring. The Tribunal is satisfied that it is more likely than not that he was aware that those doing so would be giving false identification details to avoid detection in order to avoid paying income tax on the sale of scrap metal when in fact the sale formed part of their business activity. That being the case, the managing director must have been aware that the measures introduced by the applicant to record the names and addresses of the door traders may not have been, and in some cases were not, sufficient to ensure accuracy of identification. The Tribunal is satisfied that the managing director knew this during the period that the information was being collected in the first period and when quarterly BAS returns were being submitted in the second period. The applicant must, as a result, be taken to have been also aware that some, at least, of the identification information provided by door traders was likely to be false. When it made the amended claim in 2002 it took no action to check what proportion of identities may be false and made no statement to the respondent as to any concerns it may have about the accuracy of the information provided.

43. The Tribunal is satisfied that the applicant acted in manner evidencing something more than a failure to exercise reasonable care but less than an intentional disregard of the GST Act.^[62] Hart v Commissioner of Taxation 2003 ATC 4665 ; [2003] FCAFC 105 per Hill and Hely JJ at page 214.

44. However there is, in any event, a further hurdle standing in the way of the applicant. The onus rests with the applicant to demonstrate that the assessment is incorrect. This is regardless of whether the managing director or the applicant were unaware that the information being provided was false. The Tribunal does not accept the reference to the Sterling Guardian case as being of assistance in guiding the approach the Tribunal should adopt to this case. It is not necessary for the Tribunal to set out the details concerned in the Sterling Guardian case. It is sufficient to say that the quoted comment should be read in context. It is clear that Her Honour was referring to the purpose of the GST and not to the methodology required to be put in place in order for a person to claim a credit tax input. The instant case concerns the latter aspect. The Tribunal is satisfied that the quote has little, if any, bearing in the instant case.

45. There is no evidence before the Tribunal on behalf of the applicant which establishes the assessment is incorrect. The most the applicant has done is throw doubt as to the accuracy of the method used by the respondent to satisfy itself that there were errors in the identity information on the purchase documents relied upon by the applicant to support the claim. This is different from the applicant establishing on the evidence that its claim to the input tax credit is justified.

46. The Tribunal acknowledges that Mr Lonsdale has no qualifications or experience in what constitutes reasonable sample sizing for an exercise such as was undertaken in this case. While he is an experienced investigator, having worked as a senior inspector in the customs service, he has not previously been engaged in undertaking sampling and has no formal qualifications in that field. The concerns identified by the applicant, some of which are accepted by the Tribunal, may bring into question the accuracy of the end result. However, those concerns are not such that they result in the audit result being so uncertain that it is of no useful value. The Tribunal is satisfied what is established is that extensive use of false information was being provided by the door traders to the applicant in order to disguise their true identity. And that this was known to the applicant at the time the amended claims were lodged. In any event that finding is different from the applicant establishing its entitlement to the benefit of the credit tax input to the extent of reducing the assessment to nil or to any figure which the applicant can substantiate. The applicant has not established that in the evidence before the Tribunal.

47. The Tribunal accepts Mr Lonsdale's evidence that there is likely to be a 5% possible error rate arising from the sampling undertaken. The example given by Mr Mann as to the disparity between the facts and the details revealed on his driver's licence demonstrate how such disparities can inadvertently arise. Other errors may have arisen in the recording of information given or in the transposition of it onto the computer. The Tribunal is unable to accept the submission of the respondent that there is no injustice to the taxpayer as the result of statistical error, when it is acknowledged that allowance for an error rate constituted part of the methodology applied to assess the applicant's liability. There seemed no basis on which Mr Lonsdale relied to suggest the expansion of that margin to 10% and the Tribunal does not accept that 10% figure mentioned in Mr Lonsdale's evidence. The Tribunal is satisfied that the assessment should be recalculated to allow for a 5% margin for error. That 5% should not apply to that part of the assessment dealing with the purchase by the applicant of cars for scrap metal which is dealt with in the following paragraph.

48. Where cash was paid for cars there were no identification details recorded and the total paid was recorded at the end of the day. The total amount is recorded as $119,040. No challenge was made by the applicant to the disallowance of the credit tax input claimed. Clearly no input tax credit can be allowed for this amount and there is no reason to apply the 5% error for margin as there is no dispute that no possible identification details to satisfy s 66-17(2) were recorded.

49. Turning to the methodology applied to calculate the assessment, the applicant relevantly submits that the respondent did not consider using the number of records as the basis of calculating the percentage of false records. Since s 66-17 of the GST Act is concerned with the validity of records. The primary consideration should therefore be the number of records found to be invalid rather than an extrapolation of the percentage based on the dollar value of the input tax credit claimed. It was submitted that the sampling method used was not consistent with any sampling proportionality, that is the level of invalidity should determine the amount of claim to be disallowed. The applicant submitted that the following chart as illustrating the different results achieved by utilising the different methodologies:^[63] Applicant’s further written submissions, filed 13 June 2008, paragraph 12.

50. This clearly has the result of the applicant paying a lesser amount than was assessed. The further submission that an allowance for error should be included has been dealt with earlier in these reasons.

51. The respondent submitted that the primary consideration is whether the record relied upon by the applicant complies with s 66-17 of the GST Act. Where there are two possible methods of undertaking a calculation it is not sufficient that the applicant just points to an legitimate alternative method. In the absence of providing the records required by s 66-17 does not mean it can provide an (acceptable) estimate of liability. Alternatively the respondent submits that.

• (a) the GST is payable on the value of the supply; and
• (b) the evidence establishes that that invoices of a higher value are more likely to occur in the context of taxable supply to the applicant.

52. The Tribunal accepts that in the case of a value based acquisition tax, as is the case with the GST, the respondent's methodology of calculation as in the circumstances outlined in the respondent's submission, both more logical and more apt and is to be preferred over that proposed on behalf of the applicant. In any event the Tribunal accepts, as the respondent submitted, that a proposal that a different method of calculating the level of false identity could be employed does not relieve the applicant from the burden of establishing it has positively established its claim.

Penalties

53. Division 284B of Schedule 1 of the Taxation Administration Act 1953 sets out penalties which can be imposed for the making of false or misleading statements in a material particular (s 284-75(1)). Section 284-215(2) provides that a taxpayer is not liable to a penalty to the extent that reasonable care was exercised in the making of a statement which is misleading in a material particular. The interpretation of the schedule is accompanied by Draft Miscellaneous Tax Ruling MT 2008D1. In this case the 75% penalty reflects the respondent's view that the shortfall amount resulted from an intentional disregard by the applicant of the taxation law (s 284-90(1) Item 1).

54. The applicant submitted that as the result of the applicant being in touch with the ATO prior to claiming a refund and as the result of changes made to the approach to gathering identity information it could not be said that the applicant was either careless or had acted in disregard of its tax obligations.^[64] Applicant’s written submissions, filed 23 May 2008, paragraph 32. The applicant submitted:

• (a) that the respondent has allowed remissions to the applicant on other issues arising out of the same fact situation (a claim presumably relying on unfairness or inconsistency not to permit a reduction on this issue); and/or
• (b) the shortfall arose as the result of weakness in the applicant's record keeping in a genuine attempt to establish adequate procedures to collect necessary information to comply with the GST requirements.

55. The applicant additionally submitted that there was voluntary disclosure made prior to the tax audit. Voluntary disclosure was said to arise from the applicant providing all the information upon which it relied before the commencement of the ATO audit. Finally it was also submitted that the respondent should have exercised a discretion to remit 80% of the penalty imposed, or a lesser percentage, as permitted under s 292-20, in conformity with Practice Statements PS LA 2000/9 (for penalties imposed between 1 July 2000 to 30 June 2001) and PS LA 2002/8 (for penalties imposed in the post 1 July 2001 period).

56. The applicant has been determined to be highly likely to be aware that some of the information as to identity was falsely provided by door traders. The Tribunal accepts that until November 2001 the applicant was unaware that a tax credit input could be claimed. The Tribunal accepts that the applicant, despite the advice received from the ATO as the result of the managing director's telephone call in the period immediately post the introduction of the GST, was during the first period collecting identity information from door traders for its internal purposes only and not for the provision to the ATO for purposes of claiming a GST credit tax input. Accordingly, it had no real interest in the accuracy or otherwise of the identity information concerning the door traders. Nevertheless, the Tribunal is satisfied that while the applicant did not have the claiming of credit tax input in focus at the time the information was collected, at the time it claimed the input tax credit for the first period it must be taken to be aware that some identity misinformation would have been highly likely to be contained in the information collected. This occurred in May 2002 and the applicant took no steps at that time to alert the respondent that some of the information submitted may have been at the very least suspect.

57. It was the managing director's evidence that either once the applicant's tax agent had drawn attention in November 2001 to the fact that a credit tax input could be claimed or shortly thereafter steps were taken to ensure more accurate information was obtained. From then on as a first step in an attempt to ensure better compliance the Tribunal is satisfied that the taking of vehicle registration numbers commenced. In May 2002 a form of declaration as to identity, approved by the ATO, was utilised.^[65] Exhibit A1, paragraph 17. The Tribunal is satisfied that the applicant must be taken to have been aware that some of the identity information was likely to be false, otherwise there would not have been a need to introduce the added measure of recording vehicle registration numbers. The recording of vehicle registration numbers may have encouraged some, who may not have otherwise done so, to provide more accurate information.

58. The Tribunal agrees with the applicant's submission that its record keeping, in at least for the first period, cannot be regarded as arising from mere carelessness. The information was being collected for a purpose other than that associated with claiming a refund from the ATO. In the circumstances it is not so much the record keeping for the first period which is the issue, but the lack of disclosure to the ATO at the time the claim was made as to the likely inaccuracies contained in the information which is of concern.

59. In relation to the second period the applicant must on the findings of the Tribunal be taken to have suspected identity misinformation was being provided by some of the door traders. While it tightened up its procedures on the advice of its accountant by recording vehicle registrations it did not introduce at the same time any measures which would ensure the information being collected was correct. Again the applicant must be taken to have relied on information which it knew to be highly suspect to claim a refund without making any disclosure.

60. The respondent's imposition of 75% penalty necessarily involves a finding that the applicant intended to disregard a clear obligation placed on it by the law. The Tribunal does not find that the evidence supports such a finding. In the instant case the first point to make is that the applicant was relying on information provided by third parties. As such it was not involved itself in falsifying information. The second point is that not all of the information collected by the applicant was false. There is no evidence that the applicant set out to consciously disregard the law. Rather the evidence demonstrates that the applicant proceeded to lodge a claim where it was aware that it was highly likely that some of the supporting information on which it relied contained errors. The actions of the taxpayer are consistent with it being reckless, in the sense that its conduct, in relying on information which it must have suspected contained false identity information, displays an indifference in circumstances where it would be foreseeable that some of the information provided was false. The Tribunal is satisfied that a 50% penalty is the preferred decision (s 284-90(1) Item 2).

61. The Tribunal is unable to accept the applicant's submission that a voluntary disclosure was made. The provision of information when making of a claim for a refund does not amount to a voluntary disclosure. Voluntary disclosure involves the notification to the ATO of some fact or circumstance which has the consequence that the ATO can process a claim without having to incur the cost of undertaking an audit. That is not what occurred in the instant case.

62. The final issue to determine is whether discretion should be exercised to reduce the penalty.^[66] s 284-225. The evidence was that the managing director wrote to the ATO in December 2001 requesting it to undertake whatever was necessary in order to confirm that the applicant was not under ATO investigation. According to the managing director the request arose to allay concerns expressed by other industry members as to the applicant's GST position.^[67] Exhibit A1, paragraph 14. The request did not arise as the result, among other things, of the applicant advising that the information provided by it with respect to door traders' identification details was or may have been false in circumstances where it is taken to be aware that this was highly likely to be the case.

63. Mr Mann has drawn the Tribunal's attention to the ATO issued practice statement to apply to the introduction of the GST tax for a one year period commencing 1 July 2000.^[68] Practice Statement PS LA 2000/9. As might be expected with the introduction of new tax, particularly one which was to have such broad operation, the ATO sanctioned the remission of penalties in the transitional period to reflect the reality that a lack of knowledge rather than a non compliant culture may lead to non compliance. However, as the Tribunal has determined, at the time that the applicant lodged its amended return to claim the input tax credit for the first period and during the second period the applicant must be taken to be aware that at least some of the identity information provided was highly likely to be false. No steps were taken by the applicant to address the degree of accuracy in the information relied on by it and it did not draw the attention of the ATO to the fact that a problem may exist.

64. A finding of reckless disregard does not lead easily to the exercise of a discretion to reduce the penalty rate. On the other hand such a finding does not automatically result in an exclusion of the exercise of the discretion. The Tribunal is however persuaded that at the time the applicant submitted its claim for the first period (in February 2002) it had taken advice from its accountants, had been advised to tighten up on the collection of identity information and must be taken to have known of the high likelihood of the information relied upon as containing inaccuracies. Yet it made no attempt to draw this to the attention of the ATO. Nor did the applicant then draw the ATO's attention to high likelihood of the same problem existing during the second period. If the income tax credit had been claimed in the 2000/2001 tax year reliant on the information as collected by the applicant then a favourable exercise of the discretion could have been more readily considered. That however was not the situation and the Tribunal is not persuaded that the discretion should be exercised in the applicant's favour.

65. For the reasons stated the decision under review is varied as follows:

• (i) the assessments for the applicant's claimed tax input credits for the 2000/2001 year and from then until the period ending October 2002 be reduced by 5%; and
• (ii) the penalty rate on the amounts assessed in (i) be reduced to 50%.