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DAY v FC of T

Members:
RW Dunne SM

Tribunal:
Administrative Appeals Tribunal, Adelaide

MEDIA NEUTRAL CITATION: [2010] AATA 300

Decision date: 28 April 2010

RW Dunne (Senior Member)

Introduction

1. This is an application for review of a decision by the respondent to allow in part a taxation objection lodged by Mr Terry Day ("applicant"). The taxation objection was against assessments of the goods and services tax ("GST") net amounts of Mr Day for the quarterly tax periods from 1 July 2002 to 30 June 2004, and against his assessments of income tax for the years ended 30 June 2003 and 30 June 2004 made as a result of the flow-on effect of the GST assessments. Administrative penalties were imposed on Mr Day for his failure to register for GST, for his failure to lodge GST returns for the quarterly periods 1 July 2002 to 30 June 2004 and for making a false and misleading statement resulting in an income tax shortfall in respect of the years ended 30 June 2003 and 30 June 2004.

2. At the hearing, Mr Day represented himself (with the assistance of his accountant, Mr Brinkworth) and the respondent was represented by Mr Stuart Cole, of counsel. Oral evidence was given by Mr Day.

3. The T documents and supplementary T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 were admitted in evidence (as Exhibit R1 and Exhibit R2). In addition, the Tribunal admitted the following documents in evidence:

  • • letter from ING Life Limited to Mr Day dated 17 February 2004 (Exhibit A1); and
  • • the respondent's revised asset betterment statement for Mr Day as at 30 June 2002, 30 June 2003 and 30 June 2004 (Exhibit R3).

Issues

4. The issues for the Tribunal are as follows:

  • (a) Was the applicant required to be registered for GST from 1 July 2002?
  • (b) Were the assessments of the GST net amount, issued to the applicant in respect of the quarterly tax periods from 1 July 2002 to 30 June 2004, excessive?
  • (c) Were the income tax assessments, issued to the applicant in respect of the years ended 30 June 2003 and 30 June 2004, excessive?
  • (d) Is the applicant liable to administrative penalties for failure to register for GST, for failure to furnish GST returns in respect of the quarterly tax periods from 1 July 2002 to 30 June 2004 and in relation to an income tax shortfall amount in respect of the years ended 30 June 2003 and 30 June 2004?

Legislation

5. The legislation that is relevant in this matter is contained in the Income Tax Assessment Act 1936 ("ITAA"), the Taxation Administration Act 1953 ("TA Act") and the A New Tax System (Goods and Services Tax) Act 1999 ("GST Act").

6. Under s 167 of the ITAA the respondent may make a default assessment of the amount on which, in the respondent's judgment, tax ought to be levied on a taxpayer. Section 167 reads:

" 167 Default assessment

If:

  • (a) any person makes default in furnishing a return; or
  • (b) the Commissioner is not satisfied with the return furnished by any person; or
  • (c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;

the Commissioner may make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166."

7. Part IVC of the TA Act deals with taxation objections. Within that Part, ss 14ZL, 14ZQ and 14ZY relevantly provide:

  • " 14ZL Part applies to taxation objections
    • (1) This Part applies if a provision of an Act or of regulations (including the provision as applied by another Act) provides that a person who is dissatisfied with an assessment, determination, notice or decision, or with a failure to make a private ruling, may object against it in the manner set out in this Part.
    • (2) Such an objection is in this Part called a taxation objection .
  • …
  • 14ZQ General interpretation provisions
  • In this Part:
  • …
  • objection decision has the meaning given by subsection 14ZY(2).
  • …
  • reviewable objection decision means an objection decision that is not an ineligible income tax remission decision.
  • taxation decision means the assessment, determination, notice or decision against which a taxation objection may be, or has been, made.
  • taxation objection has the meaning given by section 14ZL.
  • …
  • 14ZY Commissioner to decide taxation objections
    • (1) Subject to subsection (1A), if the taxation objection has been lodged with the Commissioner within the required period, the Commissioner must decide whether to:
      • (a) allow it, wholly or in part; or
      • (b) disallow it.
    • …
    • (2) Such a decision is in this Part called an objection decision .
    • …"

8. Where a default assessment is made, the onus of proving that the assessment is excessive is on the taxpayer. Section 14ZZK(b) of the TA Act reads:

  • " 14ZZK Grounds of objection and burden of proof
  • On an application for review of a reviewable objection decision:
  • …
  • (b) the applicant has the burden of proving that:
    • (i) if the taxation decision concerned is an assessment (other than a franking assessment)-the assessment is excessive; or
    • (ii) if the taxation decision concerned is a franking assessment-the assessment is incorrect; or
    • (iii) in any other case-the taxation decision concerned should not have been made or should have been made differently."

9. Section 17-5 of the GST Act defines a taxpayer's (or an entity's) GST net amount for a tax period. Section 17-5 reads:

  • " 17-5 Net amounts
    • (1) The net amount for a tax period applying to you is worked out using the following formula:
      GST − Input tax credits
    • where:
    • GST is the sum of all of the GST for which you are liable on the *taxable supplies that are attributable to the tax period.
    • input tax credits is the sum of all of the input tax credits to which you are entitled for the *creditable acquisitions and *creditable importations that are attributable to the tax period.
    • For the basic rules on what is attributable to a particular period, see Division 29.
    • (2) However, the *net amount for the tax period may be increased or decreased if you have any *adjustments for the tax period."

10. As it applied prior to 1 July 2007, Division 23 of the GST Act sets out who is required to be registered for GST purposes. Within Division 23, s 23-5 and s 23-15(1) relevantly read:

  • " 23-5 Who is required to be registered
  • You are required to be registered under this Act if:
    • (a) you are *carrying on an *enterprise; and
    • (b) your *annual turnover meets the *registration turnover threshold.

    Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise).

  • …
  • 23-15 The registration turnover threshold
    • (1) Your registration turnover threshold (unless you are a non-profit body) is:
      • (a) $50,000; or
      • (b) such higher amount as the regulations specify."

In relation to s 23-5 and s 23-15, Division 188 of the GST Act governs the meaning of "annual turnover". An entity (not being a non-profit body) will meet the registration turnover threshold if:

  • (a) the entity's "current annual turnover" is $50,000 or more; or
  • (b) the entity's "projected annual turnover" is $50,000 or more.

11. Division 25 of the GST Act explains how a taxpayer becomes registered for GST purposes. Within Division 25, s 25-5(2) and s 25-10(1)(a) relevantly read:

  • " 25-5 When the Commissioner must register you
    • …
    • (2) The Commissioner must *register you (even if you have not applied for registration) if the Commissioner is satisfied that you are *required to be registered.

    Note: Registering you under this subsection is a reviewable GST decision (see Subdivision 110-F in Schedule 1 to the Taxation Administration Act 1953).

  • …
  • 25-10 The date of effect of your registration
    • (1) The Commissioner must decide the date from which your *registration takes effect, or took effect. However:
      • (a) if you did not apply for registration and the Commissioner is satisfied that you are *required to be registered-the date of effect must not be a day before the day on which you became required to be registered; or
      • …"

12. Part 4-25 of Schedule 1 of the TA Act contains an administrative penalty regime that applies to taxpayers for failing to meet their taxation obligations. The provisions of Part 4-25 that relevantly apply read:

  • " 284-75 Liability to penalty
    • (1) You are liable to an administrative penalty if:
      • (a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law; and
      • (b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
      • (c) you have a *shortfall amount as a result of the statement.
    • Note: Subsection 2(2) specifies laws that are not taxation laws for the purposes of this Subdivision.
    • …
    • (3) You are liable to an administrative penalty if:
      • (a) you fail to give a return, notice or other document to the Commissioner by the day it is required to be given; and
      • (b) that document is necessary for the Commissioner to determine a *tax-related liability of yours accurately; and
      • (c) the Commissioner determines the tax-related liability without the assistance of that document.
    • Note: You are also liable to an administrative penalty for failing to give the document on time: see Subdivision 286-C.
  • 284-80 Shortfall amounts
    • (1) You have a shortfall amount if an item in this table applies to you. That amount is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been.
    • Shortfall amounts
    • Item You have a shortfall amount in this situation:
      • …
      • 3 A *tax-related liability of yours for an accounting period worked out on the basis of the statement is less than it would be if the statement did not treat an *income tax law as applying in a way that was not *reasonably arguable
      • …
  • 284-90 Base penalty amount
    • (1) The base penalty amount under this Subdivision is worked out using this table:
    • Base penalty amount
      Item In this situation: The base penalty amount is:
      2 Your *shortfall amount or part of it resulted from recklessness by you or your agent as to the operation of a *taxation law 50% of your *shortfall amount or part
      7 You are liable to an administrative penalty under subsection 284-75(3) 75% of the tax-related liability concerned
    • …
  • 288-40 Penalty for failing to register or cancel registration
  • You are liable to an administrative penalty of 20 penalty units if you fail to apply for registration, or to apply for cancellation of registration, as required by the *GST Act.
  • Note: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit.
  • …
  • 298-20 Remission of penalty
    • (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.

    • Note: Section 25D of the Acts Interpretation Act 1901 sets out rules about the contents of a statement of reasons.

    • …"

13. For the purposes of s 288-40 of the GST Act, s 4AA(1) of the Crimes Act 1914 specifies the current value of a penalty unit. Section 4AA(1) reads:

  • " 4AA Penalty units
    • (1) In a law of the Commonwealth or a Territory Ordinance, unless the contrary intention appears:
      • penalty unit means $110.
    • …"

Background

14. The facts of this case are not in dispute and largely appear in the respondent's Statement of Facts, Issues and Contentions. It is sufficient to state what follows. Mr Day obtained an Australian Business Number on 12 September 2003 and he registered for GST, with effect from 1 July 2004. During the 2002/2003 and 2003/2004 financial years, he carried on a re-upholstery business, which included advertising, providing quotations for customers, purchasing fabrics and foams and sub-contracting upholsterers under the trading name, "The Seat Shop". Prior to his registration for GST, Mr Day had been a director of The Seat Company Pty Ltd, another re-upholstery business, from 1991 until its liquidation in 2000 and subsequently until its de-registration in December 2002. His first instalment activity statement was lodged electronically on 28 October 2003. The first of his Business Activity Statements ("BAS") was lodged electronically on 25 October 2004. In it, he indicated that he elected to report and pay his GST obligations on the basis of a quarterly calculation on the BAS. Subsequent BAS were lodged in this way until the BAS for the quarter ended 30 September 2005. In it he indicated that he had elected to report and pay his GST obligations by the payment of a quarterly instalment pre-determined by the respondent. From that point onwards, BAS were not required to be lodged and GST and PAYG instalments were debited to his Running Balance Account and paid by him from time to time.

15. In November 2004, Mr Day's business became the subject of an audit by the respondent. During the audit, the respondent determined, through an asset betterment methodology, that Mr Day had earned or derived income of $134,587 in the 2002/2003 financial year and $70,431 in the 2003/2004 financial year, which he had failed to account for GST and had not declared for income tax purposes. On 5 June 2006, the respondent determined that Mr Day was required to be registered for GST on and from 1 July 2002, and assessed his liability to GST for the quarterly tax periods from 1 July 2002 to 30 June 2004 (inclusive), based on the results of the asset betterment. The total amount of GST for these quarterly tax periods, applied to his Running Balance Account, was $18,632. In addition, the respondent issued Mr Day with assessments (or amended assessments) of income tax for the 2002/2003 and 2003/2004 financial years, again based on the results of the asset betterment. The income tax and Medicare levy (on an amended taxable income of $135,961) raised in the 2002/2003 notice of amended assessment amounted to $53,321.08. The income tax and Medicare levy (on a taxable income of $47,825) raised in the 2003/2004 notice of assessment amounted to $11,236.87.

16. The respondent also determined that Mr Day was liable to administrative penalties for:

  • (a) his failure to register for GST;
  • (b) his failure to furnish GST returns to the respondent and the making of assessments of GST for the quarterly tax periods, 1 July 2002 to 30 June 2004 (inclusive); and
  • (c) making a false or misleading statement resulting in an income tax shortfall in respect of the years ended 30 June 2003 and 30 June 2004.

17. On 9 August 2006, Mr Day lodged an objection against the respondent's assessments. On 14 May 2007, the respondent determined the objection by:

  • (a) disallowing that part of the objection against the respondent's decision to register him for GST from 1 July 2002 and the decision to impose administrative penalties for the failure to register for GST;
  • (b) allowing in part the objection in relation to:
    • (i) the assessments of GST net amounts for the quarterly tax periods from 1 July 2002 to 30 June 2004 (inclusive);
    • (ii) the assessment of administrative penalties imposed in relation to those quarterly tax periods;
    • (iii) the amended assessment of income tax for the year ended 30 June 2003; and
    • (iv) the tax shortfall penalties imposed in the audit in respect of the years ended 30 June 2003 and 30 June 2004 at the rate of 75 percent for intentional disregard of the law and by remitting those penalties to the rate of 50 percent for recklessness.

Evidence

18. It was Mr Day's evidence that he did not believe he was required to register for GST from 1 July 2002. He said his income, after business expenses, was less than $50,000 and it was his understanding that he did not have to register for GST. He had commenced his business mainly to give his son a place to go every day. He had been involved in a serious car accident and had suffered some brain damage. His son was suicidal and depressed and so Mr Day had opened the shop from which his business was being conducted. He could not see how he could have earned or derived income in the 2002/2003 financial year which had given rise to unexplained or understated taxable supplies and income for tax purposes of in excess of $90,000. He accepted that the unexplained income being assessed in the 2003/2004 financial year was more realistic. He was unsure what "annual turnover" for GST purposes meant. He thought it was the equivalent of taxable income or gross income, after business expenses, for income tax purposes.

19. When questioned by the Tribunal in relation to the asset betterment statement, Mr Brinkworth said that he found the figures were largely correct. He had tried to explain the figures to Mr Day, but he could not understand them or how they were arrived at. He had not prepared Mr Day's 2002/2003 taxation return and was of the view that the 2003/2004 figures were about right. The 2002/2003 figures appeared high, but unfortunately Mr Day had not kept documentation to prove that the assessments were excessive.

Compromise discussions

20. After some discussion by the parties of the figures in the asset betterment statement, the hearing was adjourned to enable consideration of a potential compromise of the amounts of unexplained or understated GST taxable supplies and income for taxation purposes in the 2002/2003 and 2003/2004 financial years. The hearing was to be resumed the next day following the conduct of the compromise negotiations.

Consideration

Was the applicant required to be registered for GST from 1 July 2002?

21. The term "enterprise" is exhaustively defined in s 9-20 of the GST Act. Section 9-20(1) relevantly reads:

  • " 9-20 Enterprises
    • (1) An enterprise is an activity, or series of activities, done:
      • (a) in the form of a * business; or
      • (b) in the form of an adventure or concern in the nature of trade; or
      • (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or
      • (d) by the trustee of a fund that is covered by, or by an authority or institution that is covered by, Subdivision 30-B of the Income Tax Assessment Act 1997 and to which deductible gifts can be made; or
    • …"

22. On the evidence and his own admission, the Tribunal is of the view that Mr Day was carrying on an enterprise at all material times from 1 July 2002 to 30 June 2004. Under s 23-5 of the GST Act he is required to be registered for GST if his annual turnover meets the registration turnover threshold. Based on the figures contained in Mr Day's asset betterment statement and the relevant provisions in Division 23 and Division 188 of the GST Act, for a 12 month period commencing on 1 July 2002 his annual turnover exceeded the registration turnover threshold of $50,000. In these circumstances and having regard to s 25-5(2) and s 25-10 of the GST Act, the Tribunal is satisfied that Mr Day was required to be registered for GST from 1 July 2002.

Were the assessments of the GST net amount, issued to the applicant in respect of the quarterly tax periods from 1 July 2002 to 30 June 2004 (inclusive), excessive?

23. The original GST assessments raised by the respondent resulted in unexplained income, apart from dividends and/or interest received, of $134,587 in the 2002/2003 financial year and $70,431 in the 2003/2004 financial year. The adjustments to the applicant's income tax returns, based upon the GST assessments, resulted in adjusted total income of $136,281 for the 2002/2003 financial year and $70,667 for the 2003/2004 financial year. The net adjustments to the applicant's income tax returns were $114,263 for the 2002/2003 financial year and $40,393 for the 2003/2004 financial year. Following the determination of the applicant's objection and as appears in Exhibit R3, the unexplained income for GST purposes, apart from dividends and/or interest received, was adjusted to $92,288 for the 2002/2003 financial year and $64,888 for the 2003/2004 financial year. The total income adjusted for income tax purposes for the 2002/2003 financial year became $97,827 and, for the 2003/2004 financial year, $65,627. The net revised adjustment amounts to the applicant's income tax returns were $75,809 for the 2002/2003 financial year and $35,353 for the 2003/2004 financial year.

24. As a result of the compromise negotiations that took place between the parties, agreement was reached that the following adjustments be made to the unexplained income figures for the 2002/2003 financial year and the 2003/2004 financial year. The agreed adjustments were as follows:

2002/2003 Financial Year

Reduction in the amount of unexplained funds - $4,193 (Merlin visa card amount)

2003/2004 Financial Year

Reduction in the amount of unexplained funds of $14,756, comprising:

  • • the imbursement to Mr Day of monies paid to Medibank Private - $3,420
  • • superannuation fund payout from ING Life Limited - $4,254
  • • adjustment to Merlin visa card account - $3, 217
  • • reduction in gambling investments - $3,865

25. Adopting the adjustments referred to above, the following variations were made to the amounts making up the GST assessments and the net adjustments to the applicant's income tax returns in Exhibit R3:

Adjustments to GST Assessments


2002/2003 2003/2004
Understated income $92,288 $64,888
Less adjustments $4,193 $14,756*
Balance $88,095 $50,132
GST $8,008 $4,557*
Income Tax Return Adjustment
Previous net revised adjustment to income tax return $75,809 $35,353
Adjustments $4,193 $14,756*
Revised adjustment to income tax return $71,616 $20,597*
* The final adjustment to these figures will depend on the proper taxation treatment of the superannuation payout of $4,254 from ING Life Limited (Exhibit A1).

Burden of proof

26. In proceedings before the Tribunal, neither party carries the burden of proof. However, under s 14ZZK(b)(i) of the TA Act, when the Tribunal reviews an objection decision, the taxpayer applying for review has the burden of proving, where an assessment is involved, that the assessment is excessive. In seeking to show that the assessment is excessive, the taxpayer must put his or her case before the Tribunal and produce records and other evidence in support of the case. In considering the predecessor to s 14ZZK(b)(i), Foster J observed in
Eldridge v FC of T 90 ATC 4907 at 4921:

"This, it must not be lost sight of, was the main and substantial case put to the Tribunal by and on behalf of the applicant. It was through this case, mainly if not solely, that the applicant sought to demonstrate, the onus being on him, that the assessments were 'excessive' within the meaning of sec. 190(b). The Tribunal rejected this case. Quite clearly, it was not rejected on the basis of some 'rubber-stamping' of the Commissioner's previous views. It was rejected fairly and squarely upon evidence given before the Tribunal itself through documentary exhibits and through witnesses who were examined, cross-examined and re-examined in the ordinary way.

It is abundantly clear, of course, that even though the Tribunal does over again the work of the Commissioner, it does it in a significantly different way. Although it could be said to be part of an administrative hierarchy, its functions partake far more of the court than of the office desk.

It is clearly not cast in the role of the inquisitor. Although it does not act within the confines of formal pleadings, it is constrained in its inquiries and deliberations by the ambit of the taxpayer's objections. Although it is not bound by the rules of evidence (s 33(1)(c)) in reaching its decision it must act upon the evidence which is placed before it. …"

27. The Tribunal's role was explained more fully in the decision of the Full High Court in
FC of T v Dalco 90 ATC 4088. There, speaking of the ITAA (but the principles apply equally to the TA Act) and also in speaking of an appeal (but the same principles apply to a review in this Tribunal), Brennan J observed (at 4091):

"… It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.

…"

28. As Brennan J also said in Dalco (at page 4093), the manner in which a taxpayer can discharge the burden of proof varies with the circumstances. In some cases, the burden may be discharged by pointing to some error of computation. The burden can also be discharged by the taxpayer proving that the Commissioner erroneously included in the assessment an amount that should not have been included. On the other hand, as Mason J pointed out in
Gauci and Others v FC of T 75 ATC 4257 at 4261 (when considering the application of the predecessor to s 14ZZK(b)):

"Section 190(b) of the Act imposed on the appellants the burden of proving that the assessments were excessive. The appellants relied on their evidence and that of Graham in order to show that the assessments were excessive. Once that evidence was rejected, the appellants' case necessarily failed."

29. Section 14ZZK(b) effectively creates a rebuttable presumption that an assessment is not excessive. As was further said by Mason J in Gauci (at page 4261):

"The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail."

30. Finally, in commenting on the taxpayer's absence of records, Lockhart J in
McCauley v FC of T 88 ATC 4605 at 4612 referred to the judgment of Latham CJ in
Trautwein v FC of T (1936) 56 CLR 63 and said:

"I have already made some observations about the effect of the absence of records on the taxpayer's case and it is pertinent to recite the observation on this matter by Latham CJ in Trautwein's case (supra) at p 87:

'In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.'

…"

31. At several times during the course of the hearing Mr Day said he did not believe he had a GST liability and did not see how he could have unexplained income of the level referred to by the respondent for the 2002/2003 financial year. When asked whether he was aware, at the relevant time, that GST was part of the business arrangements that taxpayers had to make provision for, he openly admitted that he could not remember whether he knew much about the GST then. He acknowledged that his obligation was to keep accurate records, but he was honest in his admission that he failed to keep such records. In the final analysis, he was unable to provide any records or other documentation which demonstrated that the asset betterment statement prepared by the respondent was incorrect. He said that he simply misunderstood the notion of "annual turnover" for GST purposes and that he did not believe that he had met the registration turnover threshold that required him to register for GST.

32. It is unfortunate that Mr Day, even when it was apparently explained to him by Mr Brinkworth, was unable to understand the methodology adopted in his asset betterment statement, and to fully appreciate what information and documentation would be required to discharge the burden of proving that the relevant GST assessments and income tax assessments were excessive. He has reached agreement with the respondent regarding certain adjustments to be made to the amount of understated taxable supplies for the quarterly periods from 1 July 2002 to 30 June 2004 and the unexplained income in the income tax assessments for the 2002/2003 and 2003/2004 financial years. Subject to these adjustments and for the reasons outlined above, the Tribunal is not satisfied that the applicant has discharged the onus of proving that the relevant GST assessments and income tax assessments raised by the respondent in respect of the 2002/2003 and 2003/2004 financial years are excessive.

Is the applicant liable to administrative penalties for failure to furnish GST returns in relation to the quarterly tax periods from 1 July 2002 to 30 June 2004?

33. On the evidence before the Tribunal, the applicant did not register for GST until 1 July 2004, despite the fact that he was required to be registered for GST before that date. As a result of the audit into his taxation affairs using the asset betterment methodology, the respondent determined, rightly in the Tribunal's view, that he was required to be registered for GST and was subsequently registered from 1 July 2002. Because his annual turnover was greater than the $50,000 registration turnover threshold in the 2002/2003 financial year and he was then carrying on an enterprise, the applicant was required to be registered for GST in the 2002/2003 financial year. By virtue of the application of Division 23 and Division 188 of the GST Act, he was also required to be registered for GST in the 2003/2004 financial year. In failing to register for GST, s 288-40 of Schedule 1 to the TA Act imposes an administrative penalty of 20 penalty units, which is an amount of $2,200, when calculated for each penalty unit currently equal to $110 under s 4AA(1) of the Crimes Act 1914. This amount is automatically determined by the GST Act. Section 298-20 of Schedule 1 to the TA Act allows the respondent (and the Tribunal, standing in the shoes of the respondent) to remit an amount of penalty, in whole or in part. The Tribunal notes that the respondent considered remission in line with the requirements of Law Administration Practice Statements PS LA 2002/8 and PS LA 2007/4, which specifically deal with remission of penalty for failure to comply with GST registration obligations. The respondent refused to grant any remission of penalty. The applicant was obviously aware of the requirement to register for GST as he did so, albeit late, on 1 July 2004. For the reasons outlined by the respondent in its "Reasons for Decision" on the applicant's objection, the Tribunal agrees that no remission of the penalty imposed under s 288-40 of Schedule 1 to the TA Act is warranted.

34. As a result of the audit and the adoption of the asset betterment statement methodology, the respondent assessed the applicant's GST liability, based upon the figures contained in the statement. As the applicant failed to furnish GST returns, an administrative penalty was imposed under s 284-75(3) of Schedule 1 to the TA Act. By reference to Item 7 in the Table in s 284-90(1), a base penalty amount was imposed at the rate of 75 percent of the tax-related liability concerned. In the course of his closing submissions, Mr Cole indicated that the respondent was prepared to reduce the penalty to 50 percent of the tax-related liability. Again, for the reasons set out by the respondent in its Reasons for Decision, the Tribunal is of the view that no further reduction or remission is warranted. Having said this, the Tribunal sees no justification for any reduction in the base penalty amount under s 284-225 of Schedule 1 to the TA Act.

Tax shortfall

35. Again, as a result of the audit, administrative penalty was applied to the tax shortfall caused by the applicant's understatement of income in his 2002/2003 and 2003/2004 income tax returns. In its Reasons for Decision, the respondent concluded that the applicant acted recklessly as to the operation of a taxation law. As such, a penalty was imposed under Item 2 of the Table in s 284-90(1) of Schedule 1 to the TA Act, which sets the base penalty amount at 50 percent of the tax shortfall identified. The respondent then considered whether it was appropriate to remit all or part of the tax shortfall penalty that had been imposed. In its Reasons for Decision, the respondent considered Law Administration Practice Statement PS LA 2006/2, which provides grounds for remission of penalties applying to shortfalls on income tax returns, lodged after 1 April 2004, for the 2001 and later financial years. In considering the Practice Statement, the respondent concluded that the imposition of the penalty in the applicant's case was not unfair or unjust and no remission of the penalty was granted.

36. Did the shortfall amount result from recklessness by the applicant? In
Hart v FC of T 2003 ATC 4665, the Full Federal Court (Spender, Hill and Hely JJ) was required to consider recklessness in the context of s 226H of the ITAA, the predecessor to s 284-90(1) of Schedule 1 of the TA Act. Hill and Hely JJ referred to the concept and at pages 4673-4674 said:

"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) ATC 4111 at 4129 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 … 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)."

37. Mr Day was a business proprietor and had been so (in The Seat Company Pty Ltd) since 1991. As such, he had a responsibility to make sure his taxation obligations were complied with. An accountant acted for him and, if necessary, he could have obtained his advice about his potential GST and income tax obligations. He acknowledged that his bookwork was not what it should have been and it would seem that he did not adequately understand, or seek to obtain advice about, the operation of the tax system. In particular, he displayed an apparent indifference in his approach to the GST. Unlike the applicant in
Re Addoug and Commissioner of Taxation [2010] AATA 79, there are no grounds to reduce to 25 percent the shortfall amount, on the basis of a failure to take reasonable care to comply with a taxation law. In the applicant's case, the Tribunal is satisfied that the shortfall amount resulted from recklessness and, under s 284-90(1) of Schedule 1 of the TA Act (Item 2), the base penalty amount is 50 percent of the shortfall amount.

38. As to the general interest charge ("GIC"), the Tribunal reiterates what was said by the respondent in its Reasons for Decision. There is no provision to object to the imposition of the GIC or to seek a review of its imposition before the Tribunal. The applicant's remedy is to the Federal Court for review under the Administrative Decisions (Judicial Review) Act 1977.

Decision

39. The objection decision is varied, to the extent mentioned in paragraphs 24 and 25 of these reasons.


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