• The impact of this case on ATO policy is discussed in Decision Impact Statement: Helbers and Commissioner of Taxation (Published 5 December 2012).

HELBERS v FC of T

Members:
R W Dunne SM

Tribunal:
Administrative Appeals Tribunal, Adelaide

MEDIA NEUTRAL CITATION: [2011] AATA 657

Decision date: 23 September 2011

---

R W Dunne (Senior Member)

Introduction

1. Mr Lodewijk Helbers ("applicant") comes to this Tribunal seeking review of the objection decisions made by the Commissioner of Taxation ("respondent") in respect of amended assessments and administrative penalty notices issued for the years ended 30 June 2003, 2004, 2005 and 2006 ("Relevant Years").

2. During the Relevant Years, Mr Helbers received special early retirement payments from the Netherlands. No income tax was paid in the Netherlands and the respondent included the payments in his income tax returns for the Relevant Years and issued appropriate assessments or amended assessments. Notices of assessment and liability to pay penalty ("Penalty Assessments") were also issued. Mr Helbers objected against all the assessments and the respondent disallowed the objections in full.

3. At the hearing, Mr Helbers was self-represented and Ms S Loveband (from the ATO Legal Services Branch) represented the respondent. I received into evidence the documents lodged pursuant to s 37(1AB) of the Administrative Appeals Tribunal Act 1975 (Exhibit R1).

Issue Before The Tribunal

4. The main issue before me has resolved itself into whether the tax shortfall penalties imposed in the Penalty Assessments have been correctly imposed or whether the penalties should be remitted, wholly or in part.

Legislation

5. Although the main issue before me relates to the imposition of tax shortfall penalties in the Penalty Assessments, the provisions of the Income Tax Assessment Act 1936 ("1936 Act") and the Income Tax Assessment Act 1997 ("1997 Act") that apply incidentally in relation to the imposition of the penalties are set out below for completeness.

6. Under s 6-5 of the 1997 Act, an Australian resident must include, as assessable income in income tax returns, ordinary income derived directly or indirectly from all sources, whether in or out of Australia. Section 6-5 relevantly reads:

" 6-5 Income according to ordinary concepts (ordinary income)

• (1) Your assessable income includes income according to ordinary concepts, which is called ordinary income .

  Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

• (2) If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

  …

• (4) In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct."

7. Section 27H of the 1936 Act provides for the taxation of an annuity or pension paid from a foreign superannuation fund or source. Under s 27H, a recipient's assessable income in a tax year includes the amount of any annuity or pension received during the year, after excluding in the case of a purchased annuity or pension the amount of the undeducted purchase price, which is excluded each year from assessable income. Section 27H relevantly reads:

" 27H Assessable income to include annuities and superannuation pensions

• (1) Subject to Division 54 of the Income Tax Assessment Act 1997, the assessable income of a taxpayer of a year of income shall include:
  • (a) the amount of any annuity derived by the taxpayer during the year of income excluding, in the case of an annuity that has been purchased, any amount that, in accordance with the succeeding provisions of this section, is the deductible amount in relation to the annuity in relation to the year of income; and

    …

• (2) Subject to subsections (3) and (3A), the deductible amount in relation to an annuity derived by a taxpayer during a year of income is the amount (if any) ascertained in accordance with the

  Formula,A(B − C)/D where:

  • A is the relevant share in relation to the annuity in relation to the taxpayer in relation to the year of income.
  • B is the amount of the undeducted purchase price of the annuity.
  • C is:
    • (a) if there is a residual capital value in relation to the annuity and that residual capital value is specified in the agreement by virtue of which the annuity is payable or is capable of being ascertained from the terms of that agreement at the time when the annuity is first derived-that residual capital value; or
    • (b) in any other case-nil; and
  • D is the relevant number in relation to the annuity.

• (3) Subject to subsection (3A), where the Commissioner is of the opinion that the deductible amount ascertained in accordance with subsection (2) is inappropriate having regard to:
  • (a) the terms and conditions applying to the annuity; and
  • (b) such other matters as the Commissioner considers relevant; the deductible amount in relation to the annuity derived by the taxpayer during the year of income is so much of the annuity as, in the opinion of the Commissioner, represents the undeducted purchase price having regard to:
  • (c) the terms and conditions applying to the annuity;
  • (d) any certificate or certificates of an actuary or actuaries stating the extent to which, in the opinion of the actuary or actuaries, the amount of the annuity derived by the taxpayer during the year of income represents the undeducted purchase price; and
  • (e) such other matters as the Commissioner considers relevant. …"

8. Subdivision 284-B of Schedule 1 of the Taxation Administration Act 1953 ("TA Act") contains an administrative penalty regime that applies to taxpayers for failing to meet their taxation obligations. The provisions of Subdivision 284-B 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.

      …

• 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:

    • 1 …
    • 2 …
    • 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
    • 4 …
    • 5 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 were consistent with the *private ruling"

      …

• 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:
    1	…
    2	…
    3	Your *shortfall amount or part of it resulted from a failure by you or your agent to take reasonable care to compl with a *taxation law	25% of your * shortfall amount or part

    …

• 284-225 Reduction of base penalty amount
  • (1) The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced by 20% if:
    • (a) the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; and
    • (b) after that time, you voluntarily tell the Commissioner, in the *approved form, about the shortfall or the part of it; and
    • (c) telling the Commissioner can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the audit.
  • (2) The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced under subsection (3) or (4) if you voluntarily tell the Commissioner, in the *approved form, about the shortfall amount or the part of it before the earlier of:
    • (a) the day the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; or
    • (b) if the Commissioner makes a public statement requesting entities to make a voluntary disclosure by a particular day about a *scheme or transaction that applies to your financial affairs-that day.
  • (3) The *base penalty amount for your *shortfall amount, or for part of it, is:
    • (a) reduced by 80% if the shortfall amount, or the part of, it is $1,000 or more; or
    • (b) reduced to nil if the shortfall amount, or the part of it, is less than $1,000.

      …"

Background Facts

9. In this section of my reasons, I will set out the facts that I have found. For the most part, there is no dispute between the parties as to those facts. Where there is dispute or uncertainty, I will refer to the evidence on which I have relied to make those findings.

10. Mr Helbers was born in the Netherlands on 22 November 1941. He was employed by various employers during his working life there. From 1975 and through the 1980s, older workers were encouraged to retire up to 10 years earlier than the usual retirement age of 65. Early retired workers were entitled to a special payment during the pre-retirement age period (the Vervroegde Uittreding or "VUT"). The VUT was funded sometimes by employees and employers and sometimes by employees only. Under his employment conditions, he was required to make contributions to the VUT and fully funded the payments through these contributions, which were not tax deductible.

11. Mr Helbers first came to Australia in 1983. He returned to the Netherlands and then, after early retirement there in 2001 at the age of 61, he returned to live in Australia in October 2001. He received VUT payments, which were directly deposited into his Netherlands bank account, during the Relevant Years.

12. By letter dated 6 November 2004, Mr Helbers wrote to the respondent asking whether overseas income was classed as Australian income. The respondent advised him that his letter was to be treated as a request for a private binding ruling. The respondent requested further information from him about his foreign pension and further information was provided. On 18 January 2005, he lodged his 2003 income tax return. The return included Dutch pension income (assumed to be the VUT) ($40,070) and a tax deduction described as "undeducted purchase price of foreign pension or annuity" ($10,018).

13. Further information was requested and supplied by Mr Helbers in relation to the Dutch pension and, on 11 April 2005, a private binding ruling issued to him. The ruling stated that the early retirement pension allowance received by him from the Netherlands was subject to income tax in Australia. On 15 April 2005, Mr Helbers lodged his 2004 income tax return, which did not include the Dutch pension. At the same time, he amended his 2003 income tax return to delete the Dutch pension and the undeducted purchase price deduction from the return. Subsequently, the 2004 notice of assessment and the 2003 notice of amended assessment issued. Later, Mr Helbers lodged his 2005 and 2006 income tax returns, which did not include the Dutch pension, and notices of assessment for these years issued.

14. Following a letter from the respondent, Mr Helbers provided details of the foreign source income (VUT) that had been omitted from his income tax returns for the Relevant Years. The amounts of omitted foreign source income for the relevant tax years were:

• 2003 - $48,588
• 2004 - $49,466
• 2005 - $41,882
• 2006 - $40,654

15. On 30 July 2007, the respondent notified Mr Helbers by letter (through his accountant) of the commencement of an income tax audit of his foreign source income, and later notified him (again by letter) that the audit had been completed. The letter (in its reasons for decision) confirmed that the foreign source income was assessable to income tax in Australia and that penalties applied. On 18 July 2008 the respondent issued:

• (a) Penalty Assessments in respect of the audit for the 2003 tax year ($4,319.15), the 2004 tax year ($4,409.95), the 2005 tax year ($3,078.65) and the 2006 tax year ($2,413.60); and
• (b) notices of amended assessment of income tax issued to Mr Helbers for the Relevant Years.

16. By letter dated 17 December 2008, Mr Helbers' legal representative lodged an objection against the amended assessments for the Relevant Years. The objection (Exhibit R1, T34) relevantly reads:

• "1. My client should not be assessed on his foreign sourced income on the basis that the ATO has determined as he is entitled to claim an Undeducted Purchase Price (UPP) deduction pursuant to subsection 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936) against the foreign pension that he has received.

  …

  Article 18 of the Australia/Netherlands Double Tax Agreement provides for the taxation of social security system pensions only in the recipient's country of residence. Thus, pensions received by Australian residents under the Netherlands Social Security System must be included in their Australian assessable income pursuant to section 27H of the ITAA 1936. These pensions are not taxed in the Netherlands.

  Paragraph 27H(1)(a) of the ITAA 1936 includes in a taxpayer's assessable income the amount of any annuity/pension derived during the year of income, less the deductible amount of the UPP.

  The VUT pension is similar to an employee pension scheme. This pension has been endorsed by the Dutch government to enable Dutch residents to maximise their social pension security.

  Australian residents receiving the VUT pension are allowed the UPP deduction against this pension. The UPP amount of this pension is calculated in accordance with the formula set out in subsection 27H(2) of the ITAA 1936.

  …

  To calculate the UPP of my client's VUT superannuation pension, it is necessary to firstly determine the contributions made by my client towards that pension.

  …

  We ask the Commissioner to determine my client's amount of UPP based on this information.

  While we may not have all of the information that you require to calculate the UPP based on the formula above, and we advise that it has been very difficult to obtain the information that we require from the Ministry of Finance of the Netherlands or any other government authority or employer. In this regard, we have been advised that complete data on actual contributions is often not available from the relevant Dutch institutions.

  Accordingly, it may not be possible for the Commissioner to establish the full amount of actual contributions which form the 'purchase price' from the information that has been provided.

  In this regard, we request that pursuant to subsection 27H(3) of the ITAA 1936, the Commissioner exercise his discretion to substitute a deductible amount which is different from the amount calculated in accordance with the formula allowed in subsection 27H(2) of the ITAA 1936.

  For example, in TD 2000/46 the Commissioner agrees to allow an amount equal to 25% of the gross annual pension of various employee pension schemes as the deductable amount against the individual's pension.

  … In this regard, we ask the Commissioner to substitute an amount equal to 25% of the gross annual VUT pension as the deductible amount against his pension.

  …"

17. Mr Helbers' objection was disallowed in the absence of information being provided to enable an undeducted purchase price deduction to be determined. The respondent's reasons for decision only dealt with the penalties imposed in each of the Relevant Years. Likewise, Mr Helbers' application for review to this Tribunal only addressed the level of the tax shortfall penalty.

Evidence

18. It was Mr Helbers' evidence that he had attended the Australian Taxation Office ("ATO") in February 2002 and was advised by a taxation officer that, as the holder of a "410 class retirement visa", he would only be charged 10 percent tax on his Australian income. He subsequently wrote to the ATO on 6 November 2004 (Exhibit 1, T3) asking:

"Is overseas income classed as Australian income or not?"

19. This question was answered in the private binding ruling that the respondent had issued and Mr Helbers acknowledged that he had received the ruling. The ruling stated that the early retirement pension allowance that he received from the Netherlands was "assessable in Australia". However, Mr Helbers said the ruling differed from the advice he had received from the taxation officer in February 2002. He had paid premiums for his VUT for more than 30 years, his contributions were not tax deductible in the Netherlands, and no tax was paid there when he commenced receiving the VUT payments. He was just getting his "own saved money back".

Consideration

Whether the tax shortfall penalties imposed in respect of the 2003, 2004, 2005 and 2006 amended assessments have been correctly imposed or whether the penalties should be remitted, wholly or in part

20. Mr Helbers settled in Australia on 18 October 2001. There is no doubt that, on the evidence before me, he was a resident of Australia in each of the Relevant Years. As such, he was required to pay income tax in Australia on the ordinary income he derived, directly or indirectly, from all sources, whether in or out of Australia, during those Relevant Years (s 6-5, 1997 Act). He received the VUT (or early retirement pension allowance) deposited directly into his Netherlands bank account. However, his evidence was that he had contributed to the VUT during his working life, but he had received no tax deductions in the Netherlands for the contributions. The payments of the VUT, in turn, were not subject to tax in the Netherlands when he received them.

21. Section 27H of the 1936 Act deals with the taxation of a foreign annuity or pension. However, under s 27H, where the recipient has purchased the foreign pension, the undeducted purchase price will be excluded each year from the assessable amount of the pension. In Mr Helbers' case, his evidence (which I accept) is that he contributed the premiums for the VUT (or early retirement pension allowance) that he received in the Relevant Years and which was included in his income tax returns. However, he has been unable to produce evidence to show the total deductible amount of the contributions he made for the VUT in the Relevant Years. I understand he has produced some evidence of his contributions to enable certain deductible amounts to be allowed in the Relevant Years, and the respondent has allowed (or will allow) deductions for the proportionate amount of the contributions according to the formula set out in s 27H(2) of the 1936 Act.

22. During the hearing, I referred Ms Loveband (representing the respondent) to Taxation Determination TD 2000/46, which was raised in the objection prepared by Mr Helbers' legal representative. TD 2000/46 relevantly reads:

• "…
• 2. Article 18 of the Australia/Netherlands Double Tax Agreement provides for the taxation of public social security system pensions only in the recipient's country of residence. Therefore, pensions received by Australian residents from the Sociale Verzekeringbank (SVB) under the Netherlands social security system are not to be taxed in the Netherlands but must be included in the recipient's assessable income for Australian taxation purposes under section 27H of the ITAA 1936.
• 3. The taxable amount of these pensions can generally be reduced by the pension's undeducted purchase price, or UPP. Broadly, UPP comprises non-employer contributions made to purchase a pension which were not allowable deductions as defined in section 6 of the ITAA 1936 and which, for contributions before 1 July 1983, did not give rise to a rebate of income tax. The UPP forms the basis of the 'deductible amount' (calculated under subsection 27H(2) of the ITAA 1936) which is excluded from the pension recipient's gross pension (under subsection 27H(1) of the ITAA 1936).
• 4. Under subsection 27H(3) of the ITAA 1936, the Commissioner has a discretion to substitute a deductible amount which is different from the amount calculated in accordance with the formula in subsection 27H(2) of the ITAA 1936. The Commissioner will exercise his discretion if he considers the deductible amount calculated in accordance with subsection 27H(2) of the ITAA 1936 is inappropriate having regard to the terms and conditions applying to the pension and to any other matters he considers to be relevant.

  …

• 6. We accept that the old age pensions and the widows/widowers/orphans pensions paid by the SVB are contributory pensions and recipients of those pensions are entitled to have a deductible amount excluded from the pension received. However, the Ministry of Finance of the Netherlands has advised that complete data on actual contributions is often not available from the relevant Netherlands institutions. This means that it is often not possible to establish the full amount of actual contributions which form the 'purchase price' (as defined in subsection 27A(1) of the ITAA 1936) of such pensions.
• 7. We appreciate that it will be difficult for recipients of Netherlands social security pensions to calculate the exact amount of UPP because of the difficulties in obtaining all the necessary information. Therefore, having regard to the particulars of the Netherlands social security system and the general circumstances of Australian residents in receipt of these Netherlands social security pensions (including the average pension received and the period of time the former Netherlands residents have lived in Australia), the Commissioner will calculate the deductible amount as 25% of the gross pension paid (expressed in Australian currency).

  …"[emphasis added]

23. It was Ms Loveband's submission that TD 2000/46 did not apply in Mr Helbers' case. Having reviewed the Determination, I am satisfied that it relates to the Sociale Verzekeringbank (SVB) payable under the Netherlands social security system and not to the VUT, which was paid to Mr Helbers. In these circumstances, the standard deductible amount of 25 percent of the SVB which is referred to in the Determination is not available in the present case. In this regard, I note that the deductible amount of the undeducted purchase price of the VUT was sought (and claimed, but later deleted) by Mr Helbers in his original 2003 income tax return.

24. In relation to the issue of the administrative penalties in the Penalty Assessments for the Relevant Years, the respondent imposed a base penalty amount of 25 percent of the tax shortfall in accordance with Item 3 of the Table in s 284-90(1) of the TA Act. The respondent asserted that this base penalty amount resulted from a failure by Mr Helbers to take reasonable care to comply with a taxation law. Miscellaneous Taxation Ruling MT 2008/1 sets out the respondent's interpretation of the concept of "reasonable care" used in Subdivision 284-B of the TA Act. Paragraphs 28 and 29 of the Ruling relevantly read:

• "28. The reasonable care test requires an entity to take the same care in fulfilling their tax obligations that could be expected of a reasonable ordinary person in their position. This means that even though the standard of care is measured objectively, it takes into account the circumstances of the taxpayer. This aspect of the test is addressed in the Revised Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (No. 2) 2000 where it states at paragraph 1.69:

  Reasonable care requires a taxpayer to make a reasonable attempt to comply with the provisions of the ITAA and regulations. The effort required is one commensurate with all the taxpayer's circumstances, including the taxpayer's knowledge, education, experience and skill.⁵

• 29. Judging whether there has been a failure to take reasonable care turns on an evaluation of all the circumstances surrounding the making of the false or misleading statement to determine whether a reasonable person of ordinary prudence in the same circumstances would have exercised greater care."

In my view, what is said in paragraphs 28 and 29 of MT 2008/1 represents an accurate description of the concept of "reasonable care" as it is referred to in Item 3 of the table in s 284-90(1) of the TA Act.

25. Mr Helbers contended that the tax shortfall amount did not result from a failure by him to take reasonable care to comply with a taxation law. He argued that the shortfall arose because he had received incorrect information from the ATO in relation to his liability to pay income tax on his VUT. He had been advised by a taxation officer in February 2002 that the VUT would only be subject to a 10 percent tax, and he was confused when he received the contrary private binding ruling in April 2005. It was also argued (in the material in Exhibit R1) that Mr Helbers had made an unprompted voluntary disclosure of the relevant facts involving the VUT before the audit commenced on 30 July 2007. In these circumstances, it was asserted that any administrative penalty imposed should be reduced by 80 percent, in accordance with s 284-225(2) and (3) of the TA Act.

26. Ms Loveband contended that there had been a false or misleading statement made by Mr Helbers resulting from the failure to include his early retirement pension allowance (VUT) in his income tax returns for the Relevant Years. He did this after having received a private binding ruling in writing from the respondent advising him that his pension allowance was assessable to income tax in Australia. By ignoring the private binding ruling and omitting this assessable income, a tax shortfall had arisen and this had been caused by Mr Helbers' failure to take reasonable care to comply with a taxation law.

27. As was said by the respondent in paragraph 29 of MT 2008/1, in determining whether Mr Helbers took reasonable care, it is necessary to evaluate all of the circumstances surrounding the making of the false or misleading statement. It seems to me that the relevant circumstances are the following:

• (a) Mr Helbers' evidence (which I accept) was that he made oral enquiries at the ATO in February 2002, before lodging a tax return, and was effectively advised that he would only be charged 10 percent tax on his VUT.
• (b) He made further enquiries which were treated by the respondent as an application for a private binding ruling, which he did not understand and was confused by it. It was contrary to the earlier advice he had received from the ATO.
• (c) The private ruling indicated that the amounts he contributed towards the purchase price of the VUT would be treated as an undeducted purchase price. The return of these contributions would be free from tax and this tax-free portion would be the "deductible amount" against the VUT in the Relevant Years.
• (d) English is not his first language and he had a limited grasp of it in the hearing. This was also obvious from his responses to the ATO's enquiries. He often did not properly understand the questions and issues that were being raised.
• (e) Coming from the Netherlands in October 2001, he was not familiar with the Australian taxation system and he found that the VUT issues in his case were complex.

28. In MT 2008/1, the respondent commented (at paragraph 42):

"There is no presumption that the existence of a shortfall amount caused by a false or misleading statement necessarily or automatically points to a failure to take reasonable care. The evidence must support the conclusion that the standard of care shown has fallen short of what would be reasonably expected in the circumstances. As noted by Hill and Hely JJ in
Hart v Federal Commissioner of Taxation 2003 ATC 4665(2003) 131 FCR 203; [2003] FCAFC 105; ; (2003) 53 ATR 371 at paragraph 44:

'… in the ordinary case, the mere fact that a tax return includes a deduction which is not allowable is not of itself sufficient to expose the taxpayer to a penalty. Negligence, at least must be established…'. "

29. In my view, the evidence does not support the conclusion that the standard of care shown by Mr Helbers in (or in relation to) the Relevant Years fell short of what would be reasonably expected in the circumstances. I conclude, therefore, that there was no failure to take reasonable care on the part of Mr Helbers and thus Item 3 in the Table in s 284-90(1) in Schedule 1 to the TA Act does not apply. As a result, Mr Helbers is not liable to an administrative penalty in the Relevant Years.

Decision

30. For the reasons above, the objection decisions under review are set aside.