The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v White; Commissioner of Taxation v White (No 2) (VID 889 of 2009 ).
FC of T v WHITE (No 2)Judges:
Federal Court, Melbourne
MEDIA NEUTRAL CITATION:
 FCA 942
1. These proceedings concern the 1999 year and the 2000 year of income of Mr White. On 14 July 2010, I allowed the Commissioner's substantive appeal in relation to the 2000 year and dismissed the cross-appeal which concerned both years of income: see
Commissioner of Taxation v White 2010 ATC ¶20-195,  FCA 730 (the Appeal Decision ). In these reasons for judgment, the abbreviations used in the Appeal Decision have been adopted.
2. The issue of penalties was deferred. These reasons for decision resolve the balance of the Commissioner's Appeal Grounds, namely:
- 2.5 Whether the [AAT] erred in law by failing to address in its reasons for decision the submission made by the Commissioner that s 226L [of the 1936 Act] applied so as to render [Mr White] liable to penalty tax at a base amount of 50% of the tax shortfall.
- 2.6 [Not pursued by the Commissioner].
- 2.7 Whether the [AAT] erred in law by failing to address in its reasons for decision the submission made by the Commissioner that s 226H [of the 1936 Act] applied on the basis that the tax shortfall was caused by the recklessness of [Mr White's] tax agent.
3. It was not in dispute that Mr White was entitled to a 20% reduction in any amount of penalty assessed on the basis of voluntary disclosure after the commencement of the audit pursuant to s 226Y of the 1936 Act. As a result, if either s 226L or s 226H applied, the penalty would be reduced from 50% to 40%.
4. Before the AAT, the Commissioner contended for penalties at 50% of the tax shortfall pursuant to s 226L or s 226H of the 1936 Act in the 1999 year and the 2000 year. On appeal, the Commissioner submitted that the AAT failed to consider his submissions and that it was appropriate for this Court to make final orders with respect to the penalties issue instead of remitting the matter to the AAT. Mr White submitted that although the AAT did not expressly refer to s 226L or s 226H, it was apparent from the AAT's reasons for decision that the AAT did address the Commissioner's submissions in relation to these sections and that the AAT was correct to impose a penalty of 25% of the tax shortfall. Alternatively, Mr White submitted that if the Court allowed paragraph 2.5 or 2.7 of the Commissioner's Appeal Grounds, it was inappropriate for this Court to finally determine the issue under s 44(7) of the AAT Act and the matter should be remitted to the AAT for further hearing and submissions:
Commissioner of Taxation v Zoffanies Pty Ltd 2003 ATC 4942, (2003) 132 FCR 523 at , -.
5. Against that background, I turn to consider the Commissioner's Appeal Grounds.
Appeal Ground 2.5 - AAT's alleged failure to consider a submission made by the commissioner - section 226L
6. It is not in dispute that, before the AAT, the Commissioner had submitted that to the extent that Pt IVA of the 1936 Act did not apply to disqualify the tax benefit enjoyed by Mr White, s 226L of the 1936 Act applied so as to render Mr White liable to a base penalty at 50% of the tax shortfall. Section 226L provided:
"Subject to this Part, if:
- (a) a taxpayer has a tax shortfall for a year; and
- (b) the shortfall or part of it was caused by the taxpayer in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; and
- (c) the scheme was a tax avoidance scheme within the meaning of subsection 224(1); and
- (d) none of the scheme sections applies in relation to the scheme;
the taxpayer is liable to pay, by way of penalty, additional tax equal to:
- (e) if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct - 25% of the amount of the shortfall or part; or
- (f) in any other case - 50% of the amount of the shortfall or part."
"Tax avoidance scheme" was defined in s 224 as "a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax."
7. The issue on appeal was whether the AAT considered the Commissioner's submissions in relation to s 226L. The Commissioner submitted the AAT had failed to do so: cf s 43(2B) of the AAT Act. Mr White said the AAT did address the submissions.
8. The AAT dealt with the question of penalties in two parts. First, it summarised Mr White's submissions at  as follows:
"... Finally, it is submitted that [Mr White] has a reasonably arguable case that the contributions were not assessable, and that Part IVA did not apply, so that even if the [AAT] is satisfied that he does not succeed the penalty should be remitted to nil. It is also submitted that [Mr White] took reasonable care in implementing the plan to ensure compliance and relied on professional advice so that if Part IVA applies the penalty should be 25% reduced to 20% for voluntary disclosure."
9. The next reference is the last paragraph of the reasons for decision, where the AAT stated:
"... The final issue to be determined is that relating to penalty. The [Commissioner] properly concedes that [Mr White] is entitled to a 20% reduction for voluntary disclosure after the commencement of the audit [s 226D and/or 226Y]. Despite [Mr White's] failure to try and properly understand what was involved in the implementation of the plan, the [AAT] is sympathetic to his position that he is an engineer trying to operate a business in a competitive market and that he relied on his professional advisers to give him proper advice with respect to the adoption and implementation of the plan. The [AAT] is satisfied to accept Ruskin as a professional adviser to [Mr White] rather than as his agent. Clearly the advisers failed to provide him with the necessary material and sufficiently accurate advice to properly comprehend and implement the plan. However the [AAT] accepts that [Mr White] was careless in failing to ascertain the details of the plan. With that in mind the [AAT] is satisfied that the penalty rate which should be imposed is 25% less the 20% reduction resulting in a payment of 20%. For the reasons stated the [AAT] determines to:
- (c) vary the penalty payable for both years to 20%."
A penalty of 25% was possible under s 226G, 226K and 226L of the 1936 Act.
10. The AAT did not refer to s 226L. That omission was important. It was important because before the AAT, alternate "schemes" were propounded by the Commissioner in both the 1999 year and the 2000 year. The AAT did not refer to those schemes. In particular, the AAT did not consider whether any of those schemes:
- 1. was a tax avoidance scheme within the meaning of subs 224(1); and
- 2. if yes to (1), whether the scheme was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax: see
Federal Commissioner of Taxation v Starr 2007 ATC 5447, (2007) 164 FCR 436 at ,  and .
The AAT did refer to a submission from Mr White that his position was reasonably arguable but that submission applied to more than just s 226L of the 1936 Act. It was also relevant to the Commissioner's case on s 226K of the 1936 Act.
11. In my view, regardless of the application of Pt IVA to the substantive issues, the AAT was required to consider s 226L and, in particular, the issues identified in  above. I do not accept Mr White's submissions that, "by inference", the AAT either found that there was no tax avoidance scheme within the meaning of s 224 for the purposes of s 226L or, alternatively, applied s 226L(e) of the 1936 Act. The fact that Mr White contends that both inferences are equally open and that those inferences are inconsistent is further support for the conclusion that it cannot be said that the inference to be drawn is that the AAT considered the issues raised by the Commissioner in relation to s 226L.
12. That failure of the AAT to consider the Commissioner's submissions in relation to s 226L is a failure to carry out the duty imposed by s 43(2) of the AAT Act:
Dennis Willcox Pty Ltd v Federal Commissioner of Taxation 88 ATC 4292, (1988) 79 ALR 267 at 276-277;
Repatriation Commission v Rogers (1999) 29 AAR 164 at -;
Comcare Australia v Rowe (2002) 35 AAR 410 at ;
Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290 at  and
Commissioner of Taxation v Rozman  FCA 324 at . It is an error of law. For those reasons, I would uphold Appeal Ground 2.5.
13. That conclusion, however, raises a further question - should this Court proceed to consider the substantive question of the application of s 226L, including the making of necessary findings of fact under s 44(7) of the AAT Act, or remit the matter for further consideration by the AAT? The Commissioner submitted that the matter should be resolved by the Court. Mr White submitted that the issue should be remitted to the AAT.
14. I accept Mr White's submission that the matter should be remitted. It cannot be said that only one outcome was possible: Zoffanies 132 FCR 523 at -. There were alternate schemes. Moreover, the AAT decided the issue by reference to "carelessness": see  above. In s 226L(e), the question is whether, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct. It has to be addressed at the time when the statement was made:
Walstern Pty Ltd v Commissioner of Taxation 2003 ATC 5076, (2003) 138 FCR 1 at  - ;
Pridecraft Pty Ltd v Federal Commissioner of Taxation 2005 ATC 4001, (2004) 213 ALR 450 and
Cameron Brae Pty Ltd v Federal Commissioner of Taxation 2007 ATC 4936, (2007) 161 FCR 468. It is an objective, not subjective, test. That issue has not been addressed.
Appeal Ground 2.7 - AAT's alleged failure to consider a submission made by the commissioner - section 226H
15. Former s 226H applied a 50% penalty if the tax shortfall or part of it "was caused by the recklessness of the taxpayer or of a registered tax agent" in relation to the proper application of the taxing Acts. Before the AAT, the Commissioner submitted that the wording of former s 226H of the 1936 Act operated by reference to the recklessness of the taxpayer or his tax agent so that if the tax agent was reckless, then a penalty of 50% applied even if the taxpayer was not reckless: see
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation 2001 ATC 4111 at .
16. It was not in dispute that the AAT did not expressly refer to s 226H of the 1936 Act. As noted above, there are two aspects to s 226H - the taxpayer or the tax agent. The AAT's failure to address s 226H of the 1936 Act in relation to the tax agent is an error of law: see  above. That conclusion again raises the question - should this Court proceed to consider the substantive question of the application of s 226H including the making of necessary findings of fact under s 44(7) of the AAT Act or remit the matter for further consideration by the AAT?
17. In my view, unlike s 226L, I do not consider that the issue is required to be remitted to the AAT. I say that for a number of reasons. Section 226H operated by reference to the recklessness of Mr White or his tax agent. Ms Sarah McClusky was Mr White's tax agent. No evidence was lead by or on behalf of Mr White in relation to her mental state. Ms McClusky was not called as a witness. Mr White gave no evidence about the instructions he gave her or the inquiries she made of him at the time she prepared and filed each of his tax returns except to say that he believed that she would not have had access to the "Ruskin Stuff".
18. The Commissioner submitted, and I accept, that:
- 1. Mr White bears the onus of showing that the imposition of penalty at 50% was excessive: s 14ZZK of the Taxation Administration Act 1953 (Cth);
Hart v Federal Commissioner of Taxation 2007 ATC 2467, (2003) 131 FCR 203 at ; and
- 2. in the context of s 226H of the 1936 Act, that requires a taxpayer to show that the taxpayer did not act recklessly and the taxpayer's agent did not act recklessly with regard to the correct application of the taxing Acts.
19. In the present case, Mr White failed to lead evidence as to the mental state of his tax agent so as to show that his tax agent was not reckless. Mr White submitted that he relied upon the advice of Ruskin Financial Services Pty Ltd and that because there was no evidence that he relied upon his tax agent (Ms McClusky) in relation to the arrangement, it was unnecessary to call her to give evidence. I reject Mr White's submissions. He bore the onus: see [18(1)] above. Moreover, the fact that he relied upon Ruskin in relation to the arrangement does not answer the question posed by s 226H. Section 226H is concerned with the "correct operation" of the taxing Acts to the arrangement, not the arrangement itself.
20. For those reasons, I consider that Mr White necessarily failed to discharge the onus he bore. I note that the fact that s 226H applied a 50% penalty to the tax shortfall in the 1999 year and in the 2000 year was not a conclusion that was inconsistent with any finding by the AAT. Having reached this conclusion on s 226H it, is not necessary to remit the matter to the AAT.
21. For those reasons, I would allow the appeal on the question of penalty for both the 1999 and the 2000 income years, I would set aside paragraphs (b) and (c) of the AAT decision of 11 November 2009 and in lieu, affirm the decisions under review.