• The impact of this case on ATO policy is discussed in Decision Impact Statement: Building Company Owner and Commissioner of Taxation (Published 20 December 2012).

CASE 8/2012

Members:
SE Frost DP

Tribunal:
Administrative Appeals Tribunal of Australia, Sydney

MEDIA NEUTRAL CITATION: [2012] AATA 755

Decision date: 1 November 2012

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SE Frost (Deputy President)

INTRODUCTION

1. The dispute between the taxpayer and the Commissioner centres on the provisions of Division 7A of the Income Tax Assessment Act 1936 (the Act).

2. The taxpayer is a shareholder and director of a building company (BuildCo) that carries on business in suburban Sydney. In the 2005, 2006 and 2007 income years, BuildCo transferred amounts of money to the taxpayer. He claims that the amounts transferred were loans from BuildCo.

3. The Commissioner says that all the amounts transferred during the relevant years are assessable to the taxpayer as unfranked dividends. First, as far as the 2005 amounts are concerned, he does not accept that they are properly characterised as loans. That, according to the Commissioner, makes them assessable under s 109C of the Act. In relation to the 2006 and 2007 amounts, the Commissioner accepts that they are characterised as loans, but because they were not properly documented, they are assessable to the taxpayer under s 109D of the Act.

4. The taxpayer, in resisting the Commissioner's assessments, points to s 109RB of the Act, which gives the Commissioner a discretion to disregard or modify the effect of ss 109C and 109D. Section 109RB says that the discretion may be exercised if the "deemed dividend" result arose "because of an honest mistake or inadvertent omission". That mistake or omission must be that of the recipient of the payment, or the company itself, or "any other entity whose conduct contributed to that result". The taxpayer says that the circumstances surrounding the payment of the amounts warrant the exercise of the discretion.

THE ISSUES FOR DETERMINATION

5. The main question before the Tribunal is whether this is an appropriate case for the exercise of the discretion under s 109RB, with the result that the deemed dividends are either disregarded, or franked under Part 3-6 of the Income Tax Assessment Act 1997.

6. A preliminary issue that needs to be decided is whether the 2005 amounts are loans, or something else. The characterisation of those amounts may have a bearing on whether the discretion should be exercised in relation to those amounts.

7. There is also the question of administrative penalty imposed by Division 284 in Schedule 1 to the Taxation Administration Act 1953 (TAA). The Commissioner assessed penalty at 50% of the shortfall amount (recklessness) for the 2005 income year, and at 25% of the shortfall amount (failure to take reasonable care) for each of the 2006 and 2007 years. The taxpayer says that those amounts of penalty should not stand, either because the behaviour of the taxpayer and the agent was less culpable than the Commissioner alleges, or, alternatively, because the penalty should be remitted in any event.

8. Finally, the taxpayer asks the Tribunal to remit the shortfall interest charge imposed by Division 280 in Schedule 1 to the TAA, on the basis that it would be fair and reasonable to do so (s 280-160).

THE RELEVANT LEGISLATION

9. The taxpayer accepts that, in the absence of the exercise of the discretion in s 109RB, the payments to the taxpayer will be assessable to him - under s 109D if the payments were made in the form of a loan, and otherwise under s 109C. Both provisions have the effect that the company, BuildCo, is "taken to pay a dividend to [the taxpayer]" - either at the end of the income year in which the payment was made, or (if made as a loan) at the end of the year in which the amount was advanced if it had not been repaid by the time the company's tax return was either due or lodged (whichever is earlier).

10. However, the effect of s 109N of the Act is that a loan is not taken to be a dividend under s 109D if the loan agreement is in writing, the rate of interest payable equals or exceeds the "benchmark interest rate", and the loan term does not exceed the "maximum term" for that kind of loan. Although s 109N is not engaged in this case, its existence is important, as will become clear later in these reasons.

11. For the time being, though, it is appropriate to set out s 109RB because of its central importance to the resolution of the dispute. Section 109RB provides as follows:

• 109RB Commissioner may disregard operation of Division or allow dividend to be franked
  • (1) The Commissioner may make a decision under subsection (2) if:
    • (a) this Division (disregarding this section) operates with the result that:
      • (i) a private company is taken to pay a particular dividend to a particular entity (the recipient) under this Division; or
      • (ii) a particular amount is included, as if it were a dividend, in the assessable income of a particular entity (also the recipient) in relation to a private company under Subdivision EA; and
    • (b) the result mentioned in paragraph (a) arises because of an honest mistake or inadvertent omission by any of the following entities:
      • (i) the recipient;
      • (ii) the private company;
      • (iii) any other entity whose conduct contributed to that result.
  • (2) The Commissioner may decide in writing that:
    • (a) the result mentioned in paragraph (1)(a) should be disregarded (see subsection (4)); or
    • (b) the dividend mentioned in subparagraph (1)(a)(i) may be franked in accordance with Part 3-6 of the Income Tax Assessment Act 1997 (see subsection (6)).
  • (3) In making a decision under subsection (2) (or refusing to make such a decision), the Commissioner must have regard to the following:
    • (a) the circumstances that led to the mistake or omission mentioned in paragraph (1)(b);
    • (b) the extent to which any of the entities mentioned in paragraph (1)(b) have taken action to try to correct the mistake or omission and if so, how quickly that action was taken;
    • (c) whether this Division has operated previously in relation to any of the entities mentioned in paragraph (1)(b), and if so, the circumstances in which this occurred;
    • (d) any other matters that the Commissioner considers relevant.
  • (4) The Commissioner may make a decision under subsection (2) subject to any of the following kinds of condition:
    • (a) a condition that the recipient or another entity must make specified payments to the private company or another entity within a specified time;
    • (b) a condition that a specified requirement in this Division must be met within a specified time.
  • (5) This Division is taken not to operate with the result mentioned in paragraph (1)(a) if:
    • (a) the Commissioner makes a decision under paragraph (2)(a); and
    • (b) if the Commissioner makes the decision subject to a condition under subsection (4) - the condition is satisfied.
  • (6) If the Commissioner makes a decision under paragraph (2)(b), subparagraph 202-45(g)(i) of the Income Tax Assessment Act 1997 does not make the dividend mentioned in subparagraph (1)(a)(i) unfrankable.
  • (7) Despite subsection 33(3A) of the Acts Interpretation Act 1901, each decision made under subsection (2) must relate only to one amount that would (disregarding this section):
    • (a) be taken to be a dividend paid by the private company; or
    • (b) be included, as if it were a dividend, in the assessable income of an entity.

12. While I have set out s 109RB in full, the most significant parts of it are:

• • the reference in paragraph (1)(b) to "honest mistake or inadvertent omission"; and
• • the specification in subs (3) of the matters to which the Commissioner (and the Tribunal on review) "must have regard" in considering whether to exercise the discretion in subs (2).

ARE THE AMOUNTS PAID IN THE 2005 INCOME YEAR PROPERLY CHARACTERISED AS LOANS?

13. The taxpayer explained that in about the middle of 2004, he was renovating his house and he needed some extra money to help with the renovation expenses. He said that he decided to borrow some money from BuildCo.

14. He said that "[a]round this time"^[1] Exhibit A4 [5] he spoke to his accountant, Mr M, and told him that he was "tight on cash". He explained his need to borrow some money from the company. He asked if he could do this. Mr M said that he could. Mr M's explanation was along the following lines^[2] Exhibit A4 [5] :

When you borrow money and take money out of the company, it has to be taken as a loan that you repay. You will need to pay interest as well.

15. The taxpayer said that he instructed Mr M to treat any money that he took out of the company as a loan. He asked Mr M when he had to pay interest, and Mr M told him to pay interest when he was able to.

16. The taxpayer then started drawing cheques from BuildCo whenever he needed money. He did not always discuss these withdrawals with Mr M because, based on their conversation and the taxpayer's understanding, he "knew that [Mr M] would treat the payments as a loan"^[3] Exhibit A4 [6] .

17. At the end of the 2005 financial year, the taxpayer gave his cheque butts and bank statements to Mr M so that the income tax returns and the company accounts could be prepared.

18. Some time after the lodgment of the tax returns (but the taxpayer cannot remember exactly when), Mr M notified the taxpayer that there was "something strange"^[4] Exhibit A4 [11] about BuildCo's financial statements. Apparently the accountant in Mr M's office who had prepared the accounts and the returns had "accidentally" recorded the purported loans from BuildCo as "trade creditors". Mr M told the taxpayer this was a mistake; they should be identified and recorded as a loan. The taxpayer agreed, and asked Mr M to "fix this mistake"^[5] Exhibit A4 [11] .

19. The taxpayer's affidavit sworn on 9 December 2010 sets out the taxpayer's recollection of what happened next^[6] Exhibit A4 [13] :

On the same day, I met with[Mr M]again where[he]showed me a loan agreement which was to record the loan arrangement between me, my brother … and[BuildCo]. [My brother]was there and we signed the loan agreement.[Mr M]said to [my brother]and me words to the effect of:

The tax office says you need to have a loan agreement to make the loans you got from the business legal. I have prepared this loan agreement and it will fix the mistake that[my employee]made in the business accounts. Both of you have to sign it. When you borrow money from the business, you have to pay interest on the money you borrow from the time you get the money till the time you pay it back. The loan agreement says what interest you have to pay for the loans. It is called the bench mark and it is published on the ATO website. The loan agreement does not need to have a date because it is for the 2005 year and for future years too.

20. The undated "loan agreement" referred to is in the following terms:

[BuildCo]

&

[The taxpayer and his brother]

Directors

The director[sic]confirms that they are drawing payments for the house construction, and for other matters.

[The taxpayer]&[his brother]will undertake that from time to time will[sic]pay interest to the company to the percentage published by the Australian Taxation Office, called bench mark, calculated the date[sic]the loan was taken until the whole loan has been repaid.^[7] Annexure B to Exhibit A4

21. The document is signed by both the taxpayer and his brother.

22. The taxpayer's contention that the amounts he received from BuildCo during the 2005 income year should be characterised as loans, is not without its difficulties.

23. The first is that, unlike the position in 2006 and 2007, the 2005 financial accounts for BuildCo do not reflect the payments as a loan to the taxpayer. The explanation for this is that the accountant in Mr M's office made a mistake. The accountant himself, although apparently available, was not called as a witness. The taxpayer's solicitor gave evidence that the accountant had told her that he had no independent recollection of the taxpayer's or BuildCo's accounts for the years in question. As a result of the failure to call the accountant, the evidence as to the purported mistake is not as helpful as it might have been. There is in evidence a draft balance sheet for 2005^[8] Annexure D, page 2, to Exhibit A6 which suggests (although it is not clear) that the accountant may have initially treated some of the amounts paid to the taxpayer as loans. But the draft is markedly different from the final version^[9] Annexure B to Exhibit A6, T6-94 , which discloses no loan amounts owing by the taxpayer. There is no satisfactory explanation of the differences between the two documents. And if the amounts were truly loans despite their having been, eventually, incorrectly recorded as "trade creditors", there is no satisfactory explanation for the failure to correct the accounts so as to reflect the true position.

24. The taxpayer gave evidence that the process of preparation of company accounts and tax returns commenced with his delivery to Mr M of relevant cheque butts and bank statements. Mr M gave the documents to his employee. If the employee needed more information, he would telephone the taxpayer and ask for it. In that scenario, there is no apparent logical reason why the employee would characterise the payments in the way that he did unless he had been given some instruction to that effect by the taxpayer. That suggests that, at the time the 2005 company accounts and tax returns were being prepared, the taxpayer did not regard the amounts as loans.

25. The second difficulty is the timing of the purported loan agreement. It was apparently entered into after the lodgment of BuildCo's 2005 income tax return which, according to Mr M, occurred in June 2006. If, as the taxpayer claimed, he needed to access money from BuildCo in about the middle of 2004; and if, as he claimed, he discussed that need with Mr M at the time; and if, as he claimed, Mr M told him that the money should be taken as a loan; and if Mr M was aware, as he said he was, that a written loan agreement should be entered into, then it is difficult to understand why the preparation of the written loan agreement for the taxpayer's signature would be delayed until, at the earliest, June 2006.

26. As I understand Mr M's evidence, it would not always be his firm that was called upon to draft a loan agreement in circumstances such as these; often a taxpayer would engage a lawyer to draft the agreement. But if the responsibility fell to Mr M's firm, then he would not normally wait a year or two to prepare the agreement, but would prepare the agreement without delay^[10] Transcript, 14 March 2012, p. 77.38-78.9 . However, he added that the need for a written agreement might not be identified until after the end of the particular income year, when the paperwork provided to Mr M for preparation of accounts and tax returns discloses the fact that the company has paid amounts to the individual.

27. But, on the taxpayer's version, that is not this case. If the taxpayer intended, as early as the middle of 2004, to take the 2005 amounts as a loan, and he communicated that intention to Mr M around that time, then the loan agreement should have been prepared well before June 2006. The taxpayer's individual tax assessment notice was issued on 26 April 2006^[11] T3-18 ; it is surprising that the loan agreement had not been entered into before lodgment of the individual tax return, at the very latest.

28. These factors indicate, and I find, that the character of the amounts paid to the taxpayer in 2005 is different from the character of those paid to him in 2006 and 2007 (which were recorded as loans in BuildCo's balance sheet at 30 June 2006 and 30 June 2007 respectively). I find that both the taxpayer and Mr M are mistaken in their recollection as to the timing of their discussion about how amounts accessed from the company's bank accounts should be treated.

29. I am not satisfied that the amounts paid to the taxpayer in the 2005 income year were paid to him as loans.

SHOULD THE S 109RB DISCRETION BE EXERCISED?

30. The parties agree that the discretion in s 109RB is impliedly limited by the scope and purpose of the Act^[12] Transcript, 22 May 2012, p. 46.6-7 .

31. The taxpayer submits that it is open to the Tribunal to exercise the discretion in s 109RB because the Division 7A result arises because of an "honest mistake or inadvertent omission": s 109RB(1)(b). That mistake or omission, in the taxpayer's submission, is the failure to document the loans properly.

32. At the outset it should be noted that the taxpayer accepted that there is no room for the exercise of the discretion in respect of the 2005 income year, if I were not satisfied that the amounts paid to the taxpayer during that year were paid as loans^[13] Transcript, 22 May 2012, p. 25.45-26.4 .

33. In relation to the question of "honest mistake or inadvertent omission", the taxpayer's submission is that Mr M "clearly misunderstood the requirements set out in s 109N" of the Act^[14] Applicant’s Outline of Submissions, 22 May 2012 [18] . This is despite Mr M's written and oral evidence that:

• • In 2006, he "understood the tax law says I needed to record the loan agreement"^[15] Exhibit A6 [20] ;
• • In the tax year ending 2005, he was aware that Division 7A required "an agreement that you have borrowed the money, the amount, what you intend to do with it, repay when, how, and so on"^[16] Transcript, 14 March 2012, p. 46.11-37 ;
• • In 2005, he was aware that the tax law required interest to be paid at a particular rate^[17] Transcript, 14 March 2012, p. 47.1-4 , that minimum repayments were required^[18] Transcript, 14 March 2012, p. 47.11-15 , and that there was a maximum^[19] The question put to him referred to a “minimum” term, but Mr M appears to have understood it as a reference to “maximum”. term for the loan^[20] Transcript, 14 March 2012, p. 47.17-20 .

34. This is where s 109N becomes significant. That section provides that a company that makes a loan to (relevantly) a shareholder is "not taken under section 109D to pay a dividend" if, before the "lodgment day":

• (a) the agreement that the loan was made under is in writing; and
• (b) the rate of interest payable on the loan for years of income after the year in which the loan is made equals or exceeds the benchmark interest rate for the year; and
• (c) the term of the loan does not exceed the term (the maximum term) for that kind of loan worked out under subsection (3).

35. The loan agreement (see [20] of these reasons) does not satisfy paragraph (c) because there is no reference to a term. But for that shortcoming, and notwithstanding the rudimentary nature of the loan agreement, it seems that BuildCo would not have been taken by s 109D to have paid a dividend in either the 2006 or 2007 year.

36. If Mr M was fully aware of the requirements of s 109N (as he repeatedly asserted), then how are the shortcomings in the loan agreement explained? One possible explanation is that Mr M acted with complete indifference to compliance with the law, despite his understanding of it. That is a possibility that I reject. He is 78 years old, and at the relevant time he was 72. He was born in Italy and came to Australia 60 years ago. My own observation of him during the hearing is that he has significant difficulty expressing himself orally in English. It seems from the structure and content of the loan agreement that he may have similar difficulty with written English. While I do not go so far as to accept the taxpayer's submission that Mr M "clearly misunderstood" the requirements of s 109N, I am comfortably satisfied that it was a mistake for him to believe that the loan agreement would be sufficient for Division 7A purposes. I am also comfortably satisfied that there is no room for any inference that the mistake was anything other than an honest one.

37. In my view, the precondition in paragraph (b) of s 109RB(1) - the Division 7A result arose because of an "honest mistake or inadvertent omission" by an entity whose conduct contributed to that result - is met. That means that the discretion is capable of being exercised.

38. I now turn to the matters set out in s 109RB(3) to which I must have regard in considering whether to exercise the discretion in subs (2).

Paragraph (a) - the circumstances that led to the mistake or omission

39. I have already set out in some detail the circumstances that led to the mistake.

40. In addition to those matters, I note that Mr M gave evidence that he drafted the agreement in the way that he did because:

I wanted it to be a very simple document for[the taxpayer]as he did not understand the tax law and I did not want to confuse him. I therefore prepared a simple document for [him] to understand …^[21] Exhibit A6 [21] .

41. Of course, it is still possible to cover all the necessary requirements while keeping the language simple. Unfortunately, in the interests of simplicity, some of the essential elements were omitted.

42. Two things are clear - Mr M made an attempt to draft a compliant loan agreement, and his attempt fell short of the mark. The mistake itself is against the taxpayer; in fact, it is hard to imagine a scenario where that would not be the case. But the circumstances themselves - the circumstances that led to the mistake - are quite benign. As far as the exercise of the discretion is concerned, I regard the circumstances as neutral, weighing neither in favour of nor against the taxpayer.

Paragraph (b) - what corrective action was taken, and when

43. Paragraph (b) does not talk of action taken to try to stop the application of Division 7A; it talks of action taken "to try to correct the mistake …". Where the mistake consists of a shortcoming in the drafting of the loan agreement, what action might be taken to correct that mistake?

44. An obvious action is to amend the loan agreement so that it satisfies the requirements of s 109N. A relevant question, then, is whether the taxpayer, BuildCo or Mr M took any such action, and when.

45. The shortcoming seems to have come to the notice of the taxpayer and Mr M during the Tax Office audit of BuildCo. That started in November 2007^[22] Respondent’s Outline of Submissions, 7 March 2012 [10] and was finalised in November 2009^[23] T7-125 . During that time there was no action taken to correct the shortcomings in the loan agreement. That fact weighs against the exercise of the discretion.

Paragraph (c) - whether Division 7A has operated previously

46. The parties agree that Division 7A has not operated previously. This is a factor in favour of exercising the discretion.

Paragraph (d) - any other matters considered relevant

47. I consider the extent and timing of repayment of the loans a relevant matter under s 109RB(3)(d).

48. During the 2008 income year (and in fact, in the relatively short period between 24 January 2008 and 29 May 2008), the taxpayer repaid $434,000 towards the outstanding loans. The taxpayer asserts that the loans were repaid in full by September 2008^[24] See Schedule 1 to the Applicant’s Outline of Submissions, 22 May 2012 .

49. The repayments made between 24 January 2008 and 29 May 2008 are made up of the following amounts:

• • 24 January 2008 - $93,000
• • 11 March 2008 - $213,000
• • 29 May 2008 - $128,000

50. There are a few points to make in relation to these payments.

51. First, in his affidavit sworn on 9 December 2010, the taxpayer allocates the payment of $93,000 partly towards the 2005 purported loans and partly towards the 2006 amounts. Of the total amount, he says that $88,473.62 should be attributed to the 2006 amounts^[25] Exhibit A4 [28], Table at the top of p. 6 .

52. Second, the payments have been split between principal and interest, although in reality the calculation of the split was carried out after the event: see the affidavit of the accountant Mr C, who assisted Mr M upon Mr M's request made "in or around 2009"^[26] Exhibit A12 [5] . In other words, no-one seems to have been keeping a running account of the interest that was accruing, and therefore, no-one knew in "real time" how much of the loans had been paid off, and how much was outstanding.

53. Third, the effect of the payment of $93,000 was diluted by further borrowings from BuildCo shortly after the payment was made, and the payment of $128,000 appears to have been funded by further borrowings by the taxpayer from BuildCo just before the payment was made. That is borne out by BuildCo's "bank register", which shows that:

• • On 8 February 2008, 15 days after the taxpayer's payment of $93,000 on 24 January 2008, the very same amount - $93,000 - was paid by BuildCo to the taxpayer^[27] T6-115 ; and
• • On 15 May 2008, 14 days before the taxpayer's payment of $128,000 on 29 May 2008, the very same amount - $128,000 - was paid by BuildCo to the taxpayer^[28] T6-119 .

54. In relation to the $93,000 amount, the taxpayer denied that he knew, at the time he made the repayment, that he would need to borrow the further amount two weeks later. He said^[29] Transcript, 14 March 2012, p. 27.2-3 :

I just happened to need it two weeks later.

55. As for the $128,000 amount, he appeared to concede^[30] Transcript, 14 March 2012, p. 27.22-27 that, at the time he borrowed the further amount, he was intending to make the repayment two weeks later.

56. These facts are relevant because of the terms of s 109R of the Act. That section, headed "Some payments relating to loans not taken into account", provided at all relevant times, in subs (2):

A payment must not be taken into account[for the purpose of working out how much of a loan has been repaid]if a reasonable person would conclude (having regard to all the circumstances) that when the payment was made the entity intended to obtain a loan from the private company of an amount similar to or larger than the payment.

57. The subsection was amended in 2010 so as to extend its operation to loans obtained before the payment in question was made, but that amendment does not apply in relation to any of the periods in dispute here.

58. Counsel for the Commissioner notes that s 109R was not applied in relation to the calculation of the amounts of the loans that were outstanding, but submits that it could have been if the facts had been fully known at the time of the making of the amended assessments^[31] Transcript, 22 May 2012, p. 47.19-20 . I agree with that submission, to the extent that it relates to the $93,000 payment. The taxpayer's explanation of the circumstances surrounding the further borrowing of $93,000 in February 2008 (see [54] above) is not convincing. In my view, a reasonable person would conclude in accordance with s 109R that the taxpayer intended, when making the payment, to borrow the further amount.

59. The same conclusion is not open, in my view, in relation to the $128,000 amount referred to in [53]. The Explanatory Memorandum to the 2010 amendment of s 109R states^[32] Tax Laws Amendment (2010 Measures No. 2) Bill 2010; paragraph 1.83 of the Explanatory Memorandum that in certain circumstances, it may already be possible to disregard payments where the further borrowing precedes the loan repayment, and that the amendment was made to "put this matter beyond doubt and remove any ambiguity". I do not consider that interpretation available, in the pre-2010 version of s 109R, in relation to the $128,000 payment.

60. The Commissioner submits that s 109R is relevant not because the Commissioner now wishes to apply it - he does not - but because, as part of the "statutory architecture"^[33] Respondent’s Closing Submissions [14](d) of Division 7A and therefore a relevant matter for the purposes of s 109RB(3)(d), it can properly inform the Tribunal in the exercise of the discretion in s 109RB. I accept that submission.

61. If one viewed the loan repayments subject to the restrictions in s 109R, then the 2006 loan amounts would not be accepted as having been paid off as early as claimed by the taxpayer. Some of the repayment amounts that have so far been attributed to the 2007 loan amounts should, as a consequence, be attributed to the 2006 amounts. It also follows that the 2007 loan amounts would not be accepted as having been paid off as early as claimed.

62. On the other hand, it does not mean that minimum annual repayments (required, implicitly, by s 109N(1)(b), and in express terms by s 109E) have not been made. On the face of it, minimum repayments were not made, quite apart from any consideration of s 109R. This is because there were no repayments made at all during the 2007 income year in relation to the amounts borrowed during the 2006 income year, despite the fact that, as at 30 June 2006, the taxpayer had borrowed $139,189 from BuildCo.

63. However, even that state of affairs is not as straightforward as it first seems.

64. The taxpayer gave evidence that, on 10 August 2006 (that is, during the 2007 income year), he paid $150,000 towards what he thought was the loan that he took in the 2005 income year.^[34] Exhibit A4 [28], Table, p. 5 I have already indicated that the taxpayer has failed to satisfy me that the amounts paid to him in the 2005 income year were paid as loans. But it is not disputed that he made the $150,000 payment on 10 August 2006. It is therefore the case that, during the 2007 income year, he paid $150,000 to BuildCo whereas I am satisfied that by 30 June 2006 he had only borrowed $139,189.

65. In summary, the extent and timing of the taxpayer's repayment of the loans are factors that weigh in his favour.

Overall assessment

66. I consider that an overall assessment of the factors to which I have had regard under s 109RB(3) supports the exercise of the discretion in s 109RB for both the 2006 and the 2007 income years. I therefore exercise the discretion in accordance with s 109RB(2)(a) so as to disregard the deeming of the dividends in those years. There is no reason why any conditions should be imposed under s 109RB(4).

ADMINISTRATIVE PENALTY

67. The only shortfall amount is the one that arises in relation to the 2005 year, as a consequence of the failure to include the deemed dividend as assessable income. The Commissioner assessed the relevant behaviour as "recklessness" which, on the authorities, means gross carelessness:
BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347; [2001] FCA 164 at [77].

68. The circumstances I have outlined in these reasons do not support a finding of gross carelessness on the part of the taxpayer or his agent. Division 7A is complex. Even experienced tax agents struggle with it.

69. The appropriate penalty level is 25% of the shortfall amount, for failure to take reasonable care.

SHORTFALL INTEREST CHARGE

70. The purpose of shortfall interest charge is to compensate the Commissioner for the fact that further tax payable on an amended assessment should have been paid when the original assessment was made.

71. The charge has already been remitted to some extent, to take account of delays on the Commissioner's part in finalising the audit.

72. I am not satisfied that there are any grounds for further remission of the charge.

DECISION

73. The Tribunal decides as follows:

• (a) In matter 2010/3520 (the 2005 year) - set aside the objection decision; substitute a decision to allow the objection in part, so as to reduce the administrative penalty to 25% of the shortfall amount;
• (b) In matter 2010/3521 (the 2006 year) - set aside the objection decision; substitute a decision that the objection is allowed in full, the Tribunal having decided under s 109RB of the Act that the Division 7A result for that year should be disregarded;
• (c) In matter 2010/3522 (the 2007 year) - set aside the objection decision; substitute a decision that the objection is allowed in full, the Tribunal having decided under s 109RB of the Act that the Division 7A result for that year should be disregarded.