• The impact of this case on ATO policy is discussed in Decision Impact Statement: Kakavas and Commissioner of Taxation (Published 11 August 2011).

KAKAVAS v FC of T

Members:
E Fice SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2011] AATA 48

Decision date: 2 February 2011

---

E Fice (Senior Member)

1. In February 2007 Mr Harry Kakavas, through his tax agent, apparently lodged an Income Tax Return for the 2006 financial year in which he recorded his taxable income as nil. On 7 March 2007 the Commissioner of Taxation (the Commissioner) issued a nil initial assessment.

2. In March 2007 the Commissioner gave Mr Kakavas notice that he intended to audit his Income Tax Returns for the years of income ended 30 June 2004, 2005 and 2006. Following that audit, Mr Kakavas' amended taxable income for the 2006 income year was assessed to be $4,723,222. His tax liability was assessed to be $2,274,312.67. The Commissioner also imposed a penalty on Mr Kakavas in accordance with Item 1 of s 284-90(1) of the Taxation Administration Act 1953 (the TAA). Mr Kakavas was deemed to have intentionally disregarded a taxation law and accordingly a 75 per cent penalty was imposed. However, subsequently the Commissioner exercised his discretion under s 284-225 of Schedule 1 of the TAA and allowed a 25 per cent remission of the shortfall penalty. This resulted in a penalty assessment of $1,137,156.32.

3. On 29 January 2008 the Commissioner issued an amended assessment (the first amended assessment), assessing Mr Kakavas' tax payable as $2,461,392. The Commissioner also issued a penalty notice in the amount of $1,364,587. On 27 March 2008 Mr Kakavas lodged an objection against the amended assessment and the penalty.

4. On 8 September 2008 the Commissioner allowed Mr Kakavas' objection in part and his amended taxable income was assessed to be $4,327,858. The tax payable on this reduced assessment was $2,017,643.26. The penalty assessment was reduced accordingly but the objection against the penalty assessment was disallowed. On 15 October 2008 the Commissioner issued a second amended assessment and on 16 October 2008 he issued a new penalty notice assessing the penalty at $1,242,549.08. On 5 November 2008 Mr Kakavas lodged an application for review of the Commissioner's objection decision with the Tribunal.

5. On 6 July 2009 Mr Kakavas provided the Commissioner with a letter dated 26 June 2009 from Mr Michael Christodoulou, a registered tax agent, in which he said:

• "1. That Mr Harry Kakavas did not authorise me to lodge these income tax returns [2006];
• 2. That Mr Harry Kakavas was not aware at the time of lodgement that I had lodged these tax returns;
• 3. That Mr Harry Kakavas did not provide any information in order to prepare these tax returns for lodgement."

6. On 17 August 2009 the Commissioner advised Mr Kakavas he accepted that the income tax return lodged by Mr Christodoulou in February 2007 was not Mr Kakavas' return. The Commissioner also formed the view that in light of his acceptance that the return was unauthorised by Mr Kakavas, the assessment of income tax for the year ended 30 June 2006 was a nullity. It was therefore invalid and of no effect and the shortfall penalty assessment consequently was also of no effect. Furthermore, the Commissioner had formed the view that the application for review lodged with the Tribunal was invalid. On 19 August 2009 the Commissioner issued to Mr Kakavas a fresh notice of assessment for the year ended 30 June 2006 and a notice of assessment and liability to pay a penalty for failing to provide a return or other document. Mr Kakavas objected to that notice of assessment and the penalty notice on 8 September 2009.

7. On 12 October 2009 the Tribunal made a decision by consent whereby:

• "(a) Mr Kakavas' taxable income for the 2006 income year was reduced by $37,756 resulting in a taxable income of $4,290,102;
• (b) His tax related liability was reduced by $18,311.68 to$2,064,249.45; and
• (c) The penalty amount was reduced by $13,733.74 to $1,548,187.11."

8. On 12 January 2010 the Commissioner allowed Mr Kakavas' objection to the 19 August 2009 income tax assessment on the grounds that the assessment was issued outside his authority while there remained in place a valid assessment at that time. That was because the first amended assessment was in fact a default assessment made under s 167 of the Income Tax Assessment Act 1936 (ITAA 36). Its validity was not affected by the unauthorised return lodged by Mr Christodoulou. However, the Commissioner disallowed the objection in respect of the penalty notice. Seven days prior to the hearing of this matter, the Commissioner notified Mr Kakavas that he agreed to reduce the administrative penalty to 25 per cent of the shortfall, which reduced the penalty amount to $516,062.36.

9. The only issue before me on the hearing of this matter was whether there was any basis in law for the issue of an administrative penalty or, alternatively, whether it resulted in a perverse and unfair outcome and should be reduced to nil.

Legal liability for administrative penalties

10. Liability for administrative penalties relating to statements is set out in subdivision 284-B of Part 4-25 Division 284 of the TAA. That subdivision deals with making false or misleading statements about a tax related matter; taking a position which is not reasonably arguable about a tax related matter; and provisions which enable the Commissioner to determine a tax-related liability without documents being provided by the tax payer. Of particular relevance in Mr Kakavas' case is s 284-75(3) of the TAA which provides:

• "(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."

11. As is apparent from the above, s 284-75(3) provides for liability to an administrative penalty if all three of those matters are found to be present. The expression tax-related liability is defined in s 995-1 of the Income Tax Assessment Act 1997 (ITAA 97). It has the meaning given by s 255-1 in Schedule 1 of the TAA. That section defines a tax-related liability as a pecuniary liability to the Commonwealth arising directly under a taxation law (including a liability, the amount of which is not yet due and payable). Section 250-10 of the TAA, which is plainly a taxation law, contains an index of tax-related liabilities. Included on that list is income tax. Quite clearly, an administrative penalty related to income tax falls within the definition of the expression tax-related liability.

12. Mr Philip Crennan of counsel, who appeared on behalf of Mr Kakavas, submitted that the Commissioner's penalty assessment issued on 19 August 2009 was not supported by statute. This was because:

• "(a) the circumstances specified in s 284-75(3)(a) of the TAA did not exist at the time the 19 August 2009 penalty notice issued; or
• (b) the requirement set out in s 284-75(3)(c) of the TAA was not met."

13. In order to understand Mr Crennan's submissions, it is necessary to set out more fully the circumstances which led to the Commissioner making the 19 August 2009 penalty assessment.

14. Mr Christodoulou, a certified practicing accountant, was Mr Kakavas' registered tax agent. On 25 January 2007 the Commissioner sent to Mr Kakavas a final notice for him to lodge his Income Tax Return for the income year ended 30 June 2006. This notice issued under s 162 of the ITAA 36 and it required Mr Kakavas to furnish his Income Tax Return by 28 February 2007. Ordinarily, Mr Kakavas would have had until about the end of May in which to file that tax return. However, the Commissioner was concerned about a number of very large transactions involving Mr Kakavas and wished to conduct an audit. For that reason, he issued the early notice for Mr Kakavas to lodge his 2006 Income Tax Return. The notice stated that if he did not lodge his return within the time prescribed, he was liable to a fine of up to $2,200 for a first offence and up to $4,400 for a second offence. The notice also stated that if prosecution action was not instituted, Mr Kakavas may be liable to late lodgement penalties ranging between $110 and $550.

15. It is at this point that the evidence becomes rather blurred. In a written statement dated 19 July 2010, Mr Kakavas explained the circumstances in which his Income Tax Return for the 2006 income year was prepared. In late 2005 or early 2006 Mr Kakavas became aware that it was likely he was to be audited at some time in the near future. He said that during 2006 he was suffering from a pathological gambling addiction and in fact had instructed solicitors to commence proceedings against Crown Casino (Crown) regarding gambling losses in excess of $30,000,000. In May 2006 he proposed to his girlfriend and they were married on 10 November 2006. He was overseas between 14 November 2006 and 7 December 2006 on his honeymoon. He said that on return to Australia he was involved fully in the preparation of the claim against Crown. The Writ against Crown was lodged on 6 March 2007. Because of his action against Crown, he said he did not give Mr Christodoulou any information or instructions to enable him to prepare an Income Tax Return for the 2006 year until after March 2007. Mr Kakavas said that before March 2007, he had not:

• (a) given Mr Christodoulou instructions to prepare an Income Tax Return for the 2006 year;
• (b) authorised Mr Christodoulou to prepare an Income Tax Return for the 2006 financial year;
• (c) given instructions to Mr Christodoulou to lodge an Income Tax Return for that year;
• (d) had any conversation with Mr Christodoulou concerning the preparation and lodgement of an Income Tax Return for that year;
• (e) seen any documentation purporting to be an Income Tax Return prepared and/or lodged by Mr Christodoulou for that year;
• (f) signed any documentation that purported to be an Income Tax Return for that financial year; or
• (g) provided Mr Christodoulou with any information required to complete a tax return on his behalf.

16. In his statement of 19 July 2010, Mr Kakavas said that shortly after 13 March 2007, Mr Christodoulou told him in a telephone conversation that the Australian Taxation Office (ATO) would be conducting an audit of his affairs in respect of the 2006 income year. He said that prior to the commencement of the audit meeting, Mr Christodoulou told him that on 28 February 2007 he had inadvertently lodged with the ATO in electronic form, an Income Tax Return for the 2006 income year. He said Mr Christodoulou told him the return was essentially a blank return as it was not completed with relevant entries concerning income and deductions. Mr Kakavas did not explain what he meant by the expression inadvertently lodged. Mr Kakavas did not give oral evidence at the hearing.

17. Mr Christodoulou was also not called to give evidence at the hearing of this matter. However, I had in evidence a letter of his dated 26 June 2009 addressed to Mr Kakavas in which he said that Mr Kakavas did not authorise him to lodge Income Tax Returns for the 2006 income year. He also stated that Mr Kakavas was not aware at the time of lodgement that he had lodged those tax returns and, obviously, Mr Kakavas did not provide any information to enable him to prepare those returns for lodgement.

18. On 4 December 2007 Mr Christodoulou sent an email to Mr Dennham Jordon of the ATO in which he stated:

Soon after receiving the letter of intention to Audit on 13 March, I spoke to Judith Whittaker. She asked me if I knew that I had lodged a nil return. I told her that I did know, and that my intention was to amend the return as soon as possible. I did not say that I deliberately lodged a false return.

19. Mr Christodoulou continued in his letter to state that Mr Kakavas had not issued him with all the necessary information required to complete his return. That statement implies that he had furnished to Mr Christodoulou some information required for the 2006 Income Tax Return. Mr Christodoulou also said that he could not possibly have deliberately lodged a nil Income Tax Return as the penalty would be high and his client was well known as a high level tax payer. He said it would be bound to surface in an audit. Mr Christodoulou explained that he used a MYOB software package and when he pressed the button to complete the form, it caused the return to be lodged. He said this was not intended. In other words, the lodgement was simply a mistake. Nevertheless, as Mr Christodoulou said in the passage I have quoted above, he knew that he had lodged a nil return. Whether this was inadvertent or otherwise, he quite plainly did not inform the ATO that it was inadvertent.

20. Mr John Roache, an ATO officer, compiled a summary of telephone discussions he had with Mr Kakavas during the relevant period. The notes are dated 22 January 2008. The note extracted and set out below followed a meeting with Mr Kakavas on the Gold Coast to discuss the issue of property transactions. Mr Roache informed Mr Kakavas of the Commissioner's intention to levy an administrative penalty. Mr Roache stated:

He could not understand why the actions of his agent in lodging nil returns would result in penalty being imposed on him. It was pointed that the actions of his agent are deemed to be his actions. Harry contacted his agent who claimed he had lodged the returns by accident. This contradicted the previous statement by his agent that he'd lodged the returns to satisfy the lodgement obligation imposed by the final notice.

21. In a letter dated 17 August 2009 the Commissioner accepted Mr Kakavas' explanation that the lodgement was unauthorised. He therefore concluded that the return lodged by Mr Christodoulou on behalf of Mr Kakavas for the 2006 financial year was not his Income Tax Return for that year. Although I expressed some reservations regarding the explanation given for the lodgement of Mr Kakavas' 2006 tax return, as I have no better evidence before me, I accept that finding by the Commissioner. The finding by the Commissioner of course had an affect on the assessment of income tax for that year and also the subsequent purported amended assessments and liability to pay a shortfall penalty. The Commissioner's initial view was that those amended assessments and notices regarding shortfall penalty were of no effect as there was nothing to amend and no shortfall. This led to the first proceeding before the Tribunal being resolved by a Consent Decision made on 12 October 2009, whereby the shortfall penalty was reduced to nil and the shortfall interest charge also reduced to nil.

22. On the same day that the Commissioner accepted Mr Kakavas' claim that the Income Tax Return in question was not his, he also issued a new notice of assessment for the 2006 income year and, on the following day, a notice regarding liability to pay a penalty for failing to provide a document. However, on 8 September 2009 Mr Kakavas lodged an objection to the 18 August 2009 assessment and the 19 August 2009 notice regarding penalty. On 12 January 2010 the Commissioner gave Mr Kakavas a Notice of Objection Decision in which he allowed the objection regarding the issue of the tax assessment dated 18 August 2009 because, in issuing that assessment, the Commissioner acted outside his authority. His reasons for coming to this conclusion were:

• "(a) the first assessment was duly made in accordance with s 164 and s 166 of the ITAA 36;
• (b) the first amended assessment was authorised by s 170(1) of the ITAA 36 and also under s 166, s 167, s 173 and s 175 of that Act;
• (c) the first amended assessment is an assessment for the purposes of the act (s 173 of the ITAA 36);
• (d) where the Commissioner is not satisfied with the return furnished by any person, the Commissioner may issue a default assessment; and
• (e) the first amended assessment was in fact a default assessment issued by the Commissioner."

23. According to the Commissioner, whether a tax agent is authorised to lodge the return of income does not affect the validity of the assessment, but rather is relevant to the determination of a base rate penalty under subdivision 284 of the TAA. Also, the second amended assessment was duly authorised by s 170(3) of the ITAA 36. In other words, the Commissioner was of the view that both amended assessments were validly made. Therefore, there was no basis upon which the Commissioner could issue a fresh assessment. The latest assessment, being the second amended assessment, was valid and this could only be altered by another amended assessment.

24. As for the tax shortfall penalty, the Commissioner stated that it was correctly issued under s 284-75(3) of the TAA because, after accepting Mr Kakavas' claim that the return lodged by Mr Christodoulou was done without authority and was therefore not a tax return lodged by Mr Kakavas, Mr Kakavas had therefore failed to lodge his personal Income Tax Return by the day he was required to do so. The Commissioner in fact imposed the tax shortfall penalty on the tax shortfall which resulted from the first amended assessment. After accepting that the return lodged was not authorised by Mr Kakavas, rather than relying on the shortfall penalty provisions in s 284-75(1) of the TAA, the Commissioner relied on the fact that he failed to give a return or document to the Commissioner on the day it was required to be given and the document was necessary for the Commissioner to determine a tax-related liability of Mr Kakavas (s 284-75(3)).

25. In this particular matter we are concerned only with the validity of the penalty notice issued by the Commissioner on 19 August 2009 (the penalty notice).

26. Mr Crennan submitted there was no statutory basis for the penalty at all. He reached this conclusion through a number of alternative processes of reasoning.

27. The first approach adopted by Mr Crennan was that the penalty notice arose out of and was based on the assessment notice dated 18 August 2009. As the Commissioner subsequently accepted that this notice of assessment was issued in excess of his power, there could be no basis or foundation in law for the penalty notice. I cannot accept this submission.

28. The penalty notice states that an administrative penalty was imposed in relation to Mr Kakavas' tax-related liability because he failed to give a return, notice or other document to the Commissioner by the day it was required and, as a result, the Commissioner was compelled to determine his tax-related liability without the assistance of that document. Those words of course follow what is set out in s 284-75(3) of the TAA, except for the fact that the document must also be necessary for the Commissioner to determine a tax-related liability accurately.

29. The event which led to the Commissioner issuing the penalty notice was Mr Christodoulou's letter of 26 June 2009 regarding an absence of authorisation to lodge Mr Kakavas' tax return. As a result of the Commissioner accepting Mr Christodoulou's statement set out in that letter, he no longer considered it was appropriate or that he was able to rely on s 284-75(1) dealing with penalties for a shortfall amount. However, it did not preclude the Commissioner from relying on s 284-75(3) as the basis to issue an administrative penalty. In fact, as Mr Peter Nicholas of counsel, appearing on behalf of the Commissioner, submitted, the Commissioner was obliged to make an assessment of penalties by reason of s 298-30(1) of the TAA, which provides:

• "(1) The Commissioner must make an assessment of the amount of an administrative penalty under Division 284."

That assessment was made in accordance with the table set out at s 284-90 Item 7 which refers to liability to an administrative penalty under subsection 284-75(3). The base penalty in those circumstances is said to be 75 per cent of the tax-related liability concerned.

30. Quite plainly, liability for an administrative penalty under s 284-75(3) of the TAA is not based on or dependent upon any particular assessment made by the Commissioner. It is simply dependent upon a tax-related liability which, as I have set out above, means a pecuniary liability to the Commonwealth arising directly under a taxation law. Both parties agreed that the 18 August 2009 assessment was invalid and when the penalty notice issued, the second amended assessment remained valid. Therefore, it could not be said that Mr Kakavas did not have tax-related liability under a taxation law. It follows that I cannot accept Mr Kakavas' contention that there was no basis or foundation in law for the penalty notice.

31. The alternative way in which Mr Kakavas put his claim was based on s 284-75(3)(a) of the TAA. Specifically, Mr Crennan submitted that the circumstances set out in that section did not exist at the time the penalty notice issued and the imposition of the penalty was therefore not authorised by statute. In essence, this was because the return lodged by Mr Christodoulou on 28 February 2007 was a return filed by the required date and purported to have been made by or on behalf of Mr Kakavas. Mr Crennan referred to s 164 of the ITAA 36 which provides:

• " 164 Returns deemed to be duly made

  Every return purporting to be made or signed by or on behalf of any person shall be deemed to have been duly made by him or with his authority until the contrary is proved."

32. Mr Crennan submitted that at the date of issue of the penalty notice, the return had not been proved not to have been authorised by Mr Kakavas. According to Mr Crennan, the expression is proved means either in Court or before the Tribunal. Prior to the issue of the penalty notice, Mr Kakavas had attempted to persuade the Commissioner that the return was not authorised. On that basis he filed an objection to the shortfall penalty and issued the first Tribunal proceeding. Until 17 August 2009, the Commissioner had contended that the return was filed with the authority of Mr Kakavas and had sought to uphold the shortfall penalty notice on that basis.

33. However, Mr Crennan appears to have overlooked the fact that the Commissioner initially sought to uphold the penalty on the basis that a false or misleading statement had been made in a material particular in the form lodged which resulted in a shortfall amount. This was the basis for liability to an administrative penalty under s 284-75(1) of the TAA.

34. Following the Commissioner's letter of 18 August 2009, it is clear that the Commissioner accepted that the return lodged by Mr Christodoulou was not authorised. According to Mr Crennan, this change of position by the Commissioner does not constitute the proof required by s 164 of the ITAA 36. However, and with respect to Mr Crennan, there is nothing that I am able to locate in the ITAA 36 which requires proof of authority to be found by a Court or Tribunal. That would of course occur if that particular issue was in dispute following an objection decision. That is in fact what happened.

35. On 12 October 2009 the Tribunal made a Consent Decision pursuant to s 42C(2) of the Administrative Appeals Tribunal Act 1975 (AAT Act) whereby it remitted the shortfall penalty of $1,249,536.63 to nil; it reduced the taxable income for the 2006 year by $37,756; and it remitted the shortfall interest charge to nil. Quite clearly, this decision was made following the letter from Mr Christodoulou dated 26 June 2009 and this was the basis for the Tribunal's Consent Decision.

36. Because the Tribunal accepted the parties' views about Mr Christodoulou's lack of authority to lodge the 2006 return, s 284-75(1), on which the shortfall penalty was then based, no longer applied. However, that did not alter the fact that the Commissioner determined Mr Kakavas' tax-related liability without the assistance of a return or document, whether authorised or otherwise. He did so following an audit. The fact that the Tribunal only reduced the taxable income in that year by $37,756 is clearly indicative of the fact that a substantial tax liability remained as a result of the Commissioner's assessment following the audit.

37. Following the Tribunal's acceptance of lack of authority, as Mr Nicholas submitted, s 164 of the ITAA 36 ceased to have operation. Section 164 of the ITAA 36 raises nothing more than a rebuttable presumption regarding the authority with which a return is made. Not only was this presumption rebutted by Mr Christodoulou's letter of 26 June 2009, the Tribunal made Orders by Consent remitting the shortfall penalties claimed to be owing at that time by Mr Kakavas to nil. In making a Consent Decision under s 42C of the AAT Act, the Tribunal must be satisfied that a decision in those terms or consistent with those terms would be within the powers of the Tribunal. It follows that the Tribunal was satisfied that the basis upon which the shortfall penalty had been raised ceased to exist and hence the remittal to nil.

38. The fact that the penalty notice pre-dated the Tribunal decision does not alter Mr Kakavas' position. The grounds on which the penalty notice is based are those set out under s 284-75(3) which refers to failure to give a return, notice or other document to the Commissioner by the day it is required to be given. It having been proved to the Commissioner that the return lodged by Mr Christodoulou was without authority, the effect of that finding on the penalty decision was simply that the grounds for liability to an administrative penalty set out in s 284-75(1) ceased to exist. It cannot be correct to say, as does Mr Crennan, that one state of affairs exists until such time as lack of authority is proved, and after that date, a different state of affairs comes into existence. In my opinion, there is nothing in s 164 of the ITAA 36 to suggest anything other than upon proof of lack of authority, there is no return which has been duly made. That may or may not affect events which have taken place in reliance upon the lodgement of that return. The presumption that a return was duly made falls away and, as far as the 2006 income year is concerned in this case, the Commissioner must proceed on the basis that no return was duly made.

39. There is another approach. As I have indicated above, there is nothing in the ITAA 36 which suggests that the proof required under s 164 is a proof which must be accepted by a Court or Tribunal. In fact, as a matter of logic, the section merely requires the taxpayer to prove to the Commissioner that the return was lodged without authority. If the Commissioner accepts the taxpayer's evidence regarding lack of authority, then the Commissioner will act in accordance with what the taxpayer has claimed. In other words, it has been proved to the satisfaction of the Commissioner and the Commissioner acts in accordance with that proof. Of course if the Commissioner does not accept the taxpayer's evidence regarding lack of authority, the taxpayer may be able to raise that issue before a Court or Tribunal, which will then make a decision about that matter. However, in this case, the Commissioner provided a letter to solicitors for Mr Kakavas dated 17 August 2009 wherein he said:

• "2. The Commissioner has now reviewed his position in relation to the proceedings before the AAT as a result of the evidence supplied at that meeting. That evidence established that the returns lodged by Michael Christodoulou for the year ended 30 June 2006 for Mr Kakavas and for Elite Property Investment Group Pty Ltd were not done under instruction from and with the authority of the respective applicant."

40. The penalty notice issued two days after that letter was written by the Commissioner. In other words, at the time of issue of the penalty notice, there was no return duly made, that is, made in accordance with the notice issued by the Commissioner to Mr Kakavas to lodge a return by no later than 28 February 2007. Therefore, there can be no question about the validity of the penalty notice issued on 19 August 2009.

41. In the alternative, Mr Crennan submitted that if the Commissioner's letter of 17 August 2009 had the result of proving lack of authority for the purposes of s 164 of the ITAA 36, in any event the return lodged by Mr Christodoulou operated in law as a return of Mr Kakavas between 28 February 2007 and 17 August 2009 and it was treated as such by the Commissioner. According to Mr Crennan, in that period, as a matter of law, Mr Kakavas had provided a return by the day it was required. Therefore, the return lodged by Mr Christodoulou assisted the Commissioner in determining Mr Kakavas' tax liability when he made the first amended assessment, which issued on 29 January 2008.

42. With respect to Mr Crennan, a cursory examination of the return lodged by Mr Christodoulou discloses nil total income, nil deductions and nil taxable income. In my opinion, it cannot be said that the Commissioner gained any assistance at all from that return in making the first amended assessment. In fact, it is clear from the documents before me that the first amended assessment was made following the audit conducted by the Commissioner and a number of subsequent discussions between ATO officers' and Mr Kakavas. I find that the first amended assessment and the resulting tax liability of Mr Kakavas was made without the assistance of Mr Kakavas' return lodged on 28 February 2007.

43. Mr Crennan also submitted that between 28 February 2007 and 17 August 2009, because the return lodged by Mr Christodoulou was deemed in law to be an authorised return, any other document provided by Mr Kakavas during that period by way of correction or supplement to the purported return could not have been, in law, an Income Tax Return that Mr Kakavas was obliged to give by the required date. All that Mr Kakavas could do was to provide an amended Income Tax Return. According to Mr Crennan, what follows is that Mr Kakavas could not have taken any steps to provide the return to stand in place of the return lodged by Mr Christodoulou until after 17 August 2009. That is after the date required for lodgement had passed and after the Commissioner had determined Mr Kakavas' tax liability for the 2006 income year. Therefore, Mr Kakavas was never in a position where he could comply with the obligation to lodge, by a required date, an Income Tax Return for the year 30 June 2006.

44. With respect to Mr Crennan, there was no evidence before me that Mr Kakavas attempted to lodge a tax return by the required date. Prior to 28 February 2007, there was no reason why he could not have lodged an Income Tax Return. He could in fact have complied with the obligation set out in the notice from the Commissioner. He did not do so. There was no evidence that he attempted to do so. After that date had passed, Mr Kakavas was in default. It mattered not whether he subsequently wanted to lodge a return as he was in default in any event.

45. Nevertheless, Mr Crennan submitted that construing s 284-75(3) of the TAA in such a way as to require the imposition of a penalty, which depends on a matter of proof subsequent to the date on which the Commissioner required compliance with a notice to lodge a return, resulted in the fact that compliance would never be possible. That would be absurd, capricious, harsh and unreasonable. With respect, I cannot accept that submission. If in fact a penalty notice was based on the lodgement of the return by Mr Christodoulou which contained false or misleading material, as it was until such time as the Commissioner became satisfied that proof of lack of authority had been furnished by Mr Kakavas, then the Commissioner could simply remit the entire penalty. In fact, that is precisely what the Commissioner did.

46. In my opinion, the presumption contained in s 164 of the ITAA 36 was displaced at the time the Commissioner accepted that the return lodged by Mr Christodoulou was made without Mr Kakavas' authority. The presumption having been rebutted means that no return was lodged by Mr Kakavas by the due date, or at any time following the due date. Therefore, I find that the first limb of s 284-75(3) of the TAA is satisfied.

47. As for the second limb of s 284-75(3), there was no dispute, nor could there be, that a return is a document necessary for the Commissioner to determine a tax-related liability accurately. Therefore, this limb is also satisfied.

48. The final limb of s 284-75(3) requires the Commissioner to determine the tax-related liability without the assistance of the return. The evidence was that the Commissioner determined Mr Kakavas' tax-related liability as a result of information obtained on the audit, including an interview at which Mr Kakavas and Mr Christodoulou were present in November 2007. Accordingly, I find that the third limb of s 284-75(3) is also satisfied.

49. From my findings above, it follows that the penalty notice issued on 19 August 2009 is a valid notice issued in accordance with the TAA.

Remission of penalty

50. Mr Crennan submitted that the penalty should be remitted to nil as it was harsh and unfair and resulted from a retrospective imposition of the penalty. Mr Crennan submitted the following reasons for this submission:

• (a) Mr Kakavas' personal situation at the time his tax return for the 2006 income year was due;
• (b) the fact that Mr Kakavas was notified within 14 days of the return being lodged by Mr Christodoulou that there was to be an audit and he co-operated fully with that audit;
• (c) the lodging of the return by Mr Christodoulou was an honest and unintended mistake; and
• (d) the Commissioner has dealt with Mr Kakavas in an unreasonable and unfair manner.

51. Section 298-20 of the TAA provides:

" 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.

• (3) If:
  • (a) the Commissioner refuses to any extent to remit an amount of penalty; and
  • (b) the amount of penalty payable after the refusal is more than 2 penalty units; and

    Note: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit.

  • (c) the entity is dissatisfied with the decision;

    the entity may object against the decision in the manner set out in Part IVC."

52. The base penalty amount originally assessed by the Commissioner for the penalty under s 284-75(3) in accordance with Item 7 of s 284-85 was 75 per cent of Mr Kakavas' tax liability ($2,082,561.13) which amounted to $1,561,920.85. That amount was reduced to $1,548,187.11 following the Tribunal's decision dated 12 October 2009 whereby Mr Kakavas' taxable income was reduced by $37,756. However, on 7 October 2010, the Commissioner remitted the penalty to $516,062.36, being 25 per cent of the tax liability. The Commissioner did not give reasons for that reduction. It appears to me that under s 298-20 of the TAA, the Commissioner is not required to give reasons except in the circumstances set out in s 298-20(2) of the TAA.

53. In
Re Hobart Central Childcare Pty Ltd and FCT 2005 ATC 2351; (2005) 60 ATR 1314, Deputy President Forgie said, at 1357:

" Section 298-20 of Schedule 1 to the TA Act provides that the Commissioner may remit all or part of a penalty. It does not set out any guidelines as governing the exercise of the discretion. Given the provisions relating to the imposition of penalties, there would clearly need to be circumstances that could be regarded as mitigating the taxpayer's behaviour in some way while bearing in mind the purpose for which income tax is imposed and paid and the role of the ITA Act and TA Act in supporting that purpose."

I respectfully adopt what Deputy President Forgie said in that case.

54. Regarding the personal situation of Mr Kakavas at the time the Income Tax Return was lodged by Mr Christodoulou, his evidence was that he was consumed by a pathological gambling addiction and that he had commenced legal proceedings against Crown, a Writ being filed at the Supreme Court in March 2007. However, in my opinion, that is not a valid factor to be taken into account in respect of mitigation. As Mr Nicholas submitted, Mr Kakavas had the services of a tax agent to attend to his lodgement obligations. Mr Kakavas' explanation that he was fully occupied with providing instructions to senior counsel for the Writ against Crown is not an adequate explanation. Plainly, his statutory obligations to lodge an Income Tax Return should have been given priority. There was no evidence that his claim might become statute barred or that there was any other compelling urgent explanation for its lodgement prior to attending to his tax affairs.

55. The fact that Mr Kakavas co-operated and voluntarily assisted the Commissioner in making the first amended assessment should be considered as a mitigating factor. Quite plainly, the Commissioner's expenses in determining Mr Kakavas' tax liability were reduced as a result of his co-operation.

56. I have difficulty with the submission that the return lodged by Mr Christodoulou was an honest and unintended mistake by him. In fact, in a telephone log kept by an officer of the ATO regarding conversations with Mr Christodoulou on 1 May 2007, this is recorded:

"I again asked if there was a reason for the zero income tax returns lodged in March 2007. He advised that he did not have the information and the documents at the time and just lodged the returns to meet the lodgement demand notice. I asked if his intention was to amend the returns prior to the interview. He advised that he would if that was possible but there was little or no income in Mr Kakavas' or the company returns. He had only had short conversations with Mr Kakavas about his property purchases and had little information."

57. While the note of the telephone conversation with Mr Christodoulou strongly suggests quite a different reason for the lodgement of the nil return for 2006 by Mr Christodoulou, without giving Mr Christodoulou the opportunity to respond to that material, I am not prepared to make any findings about that evidence. Nevertheless, the failure of Mr Kakavas or Mr Christodoulou to lodge any material to refute that explanation and the subsequent inconsistent explanations about the reasons why the return was lodged causes me to find that this factor should not go towards mitigation of the penalty.

58. As to the final matter submitted by Mr Crennan, I do not accept that the Commissioner dealt with Mr Kakavas unreasonably and unfairly. There was nothing unfair about the Commissioner continuing to maintain that until 26 June 2009, the return lodged by Mr Christodoulou was authorised. As the evidence discloses, despite an assessment having been made following the lodgement of the return, claims regarding the inadvertent or unauthorised lodgement of that return only arose in discussions prior to the audit in November 2007. Furthermore, there is nothing in the evidence to suggest that Mr Christodoulou on behalf of Mr Kakavas, or Mr Kakavas himself, requested an amendment to the initial assessment and provided further information voluntarily.

59. I cannot accept Mr Crennan's submission that there was some unfairness in the Commissioner determining, some two years after it was lodged, that the return was not authorised. He then imposed an administrative penalty on the grounds that a return had not been provided by the required date. It was up to Mr Kakavas to prove to the Commissioner that the return was unauthorised and there was nothing which prevented him, when he became aware of the lodgement of the nil return by his tax agent, from taking steps to rectify that situation immediately. For reasons which were not explained, he did not take any steps other than to submit voluntarily to the audit. In those circumstances, I find there was nothing unreasonable or unfair about the conduct of the Commissioner.

60. The Commissioner submitted that the appropriate penalty rate was 25 per cent of the tax-related liability. This reflected Mr Kakavas' previous good compliance history and his co-operation during the audit of his affairs. I agree.

Conclusion

61. I have found that the penalty notice issued by the Commissioner on 19 August 2009 was a valid notice issued pursuant to s 284-75(3) of the TAA. Mr Kakavas failed to give a return to the Commissioner by the date it was required to be given; the return was necessary for the Commissioner to determine Mr Kakavas' tax-related liability accurately; and the Commissioner determined Mr Kakavas' tax-related liability without the assistance of the return.

62. By 26 June 2009, Mr Kakavas had proved to the Commissioner's satisfaction that the return lodged by his tax agent, Mr Christodoulou, was not authorised by him. As a result, the position at law was as though Mr Kakavas had not lodged a return for the 2006 income year. The Commissioner determined Mr Kakavas' tax liability in the course of an audit conducted in November 2007. Once the tax liability had been established, the Commissioner was required by s 298-30(1) of the TAA to make an assessment of the amount of an administrative penalty under Division 284. He did this and that assessment is set out in the penalty notice issued on 19 August 2009.

63. Although the Commissioner subsequently reduced the penalty rate from the base rate to 25 per cent, Mr Kakavas nevertheless contended that it should have been reduced to nil because the Commissioner's conduct was unfair and unreasonable. However, while there were some mitigating factors which should be taken into account when calculating the penalty rate, there are also factors on the other side of the ledger suggesting it should not be reduced. In the circumstances, I am satisfied that the Commissioner's reduction of the base penalty rate to 25 per cent was correct. Accordingly, the Tribunal sets aside reviewable decision dated 12 January 2010 insofar as it relates to the penalty notice dated 19 August 2009 and in substitution decides the base penalty rate is reduced to 25 per cent, thereby remitting the penalty to $516,062.36.