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OUTBOUND LOGISTICS PTY LTD v FC of T

Members:
G Hughes M

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2012] AATA 899

Decision date: 19 December 2012

Dr Gordon Hughes (Member)

19 December, 2012

1. This application related to a decision by the respondent to impose shortfall penalties, under section 284-75 of Schedule 1 to the Taxation Administration Act 1953 (the Act), for GST and income tax shortfalls sustained by the applicant, Outbound Logistics Pty Ltd. The GST shortfall penalty related to the GST period between 1 October and 31 October 2008 (GST penalty) and the income tax shortfall penalty related to the income tax year ended 30 June 2008 (income tax penalty).

2. The issues arose out of a research and development (R&D) expenditure by the applicant.

3. The Tribunal was required to review the respondent's decision to impose the shortfall penalties and, specifically, to consider whether the tax shortfall amounts were the result of the applicant's recklessness and accordingly subject to a penalty of 50 per cent of the shortfall amounts, in accordance with section 284-90(1) of Schedule 1 to the Act.

4. An application to review a second GST penalty in respect of the GST period 1 April to 30 June 2009 was withdrawn at the commencement of the hearing.

5. The applicant was pursuing an R&D project to develop an internet-based service to provide small and medium enterprises (SMEs), operating in a home delivery environment, with system driven processes. These system driven processes were intended to allow SMEs to deliver enhanced levels of customer service by using an algorithm to manage warehouse operations and customer orders. The project would also ensure that the system could be deployed to any platform.

6. On 24 June 2008 Mr Richard Morrey, in his capacity as a director of the applicant, signed an R&D Services Agreement (the agreement) and engaged the services of Amskan Holdings Pty Ltd (subsequently known as ThorSol Technologies Pty Ltd, and referred to in this decision as ThorSol). Although, as at that date, Mr Morrey was not officially appointed as a director of the applicant and the applicant had not been set-up as a company, the applicant's accountant immediately rectified this.

7. ThorSol was a registered research agency and was engaged to assist the applicant in meeting its requirements under the AusIndustry R&D scheme.

8. In essence, ThorSol agreed to enter into and manage contracts with subcontractors. The subcontractors would perform the relevant R&D and the applicant would meet the subcontractors' costs and pay a project management overhead fee of 7.5 per cent.

9. The agreement required the applicant to make payments to ThorSol within 14 days of becoming due. ThorSol was entitled to receive payments monthly.

10. On 25 June 2008Thorsol invoiced the applicant for $1,017,706.80 including GST of $92,518.80. This invoice stipulated payment for services in relation to projects commencing on 11 June 2008 and scheduled to conclude on 30 June 2009.

11. On 4 July 2008 the applicant engaged Capital Technic Consulting Pty Ltd (CTC) to assess the agreement with ThorSol and to determine what would be claimable under the R&D concession program. The scope of CTC's engagement also included ensuring that the applicant complied with AusIndustry and Australian Taxation Office (ATO) requirements.

12. CTC was the parent company of the Capital Technic Group of Companies, which included ThorSol as a subsidiary.

13. On 24 July 2008 the applicant registered its R&D activities with AusIndustry for the 2007-2008 income year and this registration was approved on 28 July 2008.

14. On 30 August 2008 the applicant lodged its business activity statement (BAS) for the period between 1 April and 30 June 2008, claiming an input tax credit of $92,518. The applicant's tax agent prepared the BAS.

15. On 10 September 2008 the applicant lodged its income tax return for the year ended 30 June 2008, claiming an R&D tax offset of $346,945.50. The applicant's tax agent prepared the income tax return using an R&D tax schedule prepared by CTC.

16. On 16 September 2008 the respondent disallowed the input tax credit claim as the applicant was reporting GST on a cash basis and had not yet remitted the invoiced amount to ThorSol. Penalties were assessed at 25 per cent for lack of reasonable care but were remitted in full due to the applicant's compliance history.

17. The applicant had been registered for GST since 21 September 2006 and accounted for GST on a cash basis from that date. On 1 October 2008 the applicant changed from the cash basis to a monthly accruals reporting basis for GST purposes.

18. On 30 September 2008 the applicant engaged a subcontractor, GTS Interactive (GTSI), for design and development services, at a cost of $95,000 per month plus GST. On 8 October 2008 the applicant entered into a loan agreement with GTSI for $1,250,000. The loan agreement specified that the funds were to be used for the sole purpose of funding R&D with GTSI.

19. On 10 December 2008 the applicant lodged its BAS for the period between 1 July 2008 and 30 September 2008, claiming input tax credits of $93,568. This was disallowed by the respondent on 18 December 2008 because the applicant was still reporting GST on a cash basis during the period between 1 July and 30 September 2008 and had not yet remitted the invoiced amounts to ThorSol.

20. On 29 October 2008 the applicant received a refund of $348,469.97 in respect of its income tax return for the financial year ended 30 June 2008.

21. On 13 January 2009 the applicant lodged its October (monthly) 2008 BAS claiming an input tax credit of $92,518. The applicant's tax agent prepared the BAS. On 19 January 2009 the applicant received a refund of $92,518.

22. The refunds of $348,469.97 and $92,518 are at the heart of the present dispute.

23. The respondent highlighted a series of subsequent payments between February 2009 and May 2009 to ThorSol under the agreement, and by GTSI to the applicant under the loan agreement. The respondent drew the inference that these payments were ultimately sourced from the refunds received from the ATO.

24. On 2 February 2009, the applicant was issued with an invoice from ThorSol for an amount of $112,337.50, followed by subsequent invoices in February, March (twice), May and June for a total of $1,017,706.80.

25. On 30 June 2009, the applicant was issued with an invoice from ThorSol for $1,005,361.50 including GST of $91,396.50, stipulating services for the period 1 July 2009 to 30 June 2010.

26. On 24 July 2009 the applicant lodged its BAS for the quarterly period ended 30 June 2009, claiming an input tax credit of $91,396.00. The applicant's tax agent prepared the BAS. This was paid to the applicant.

27. On 5 August 2009, AusIndustry approved the applicant's R&D tax concession for the year ended 30 June 2009.

28. On 22 December 2009 and subsequently on 7 January 2012, the respondent wrote to the applicant advising of its concerns that there has been a R&D tax offset abuse through a registered research agency. On 19 February 2010, the applicant made a voluntary disclosure to the Commissioner that it had incorrectly claimed input tax credits in its BAS for the period 1 October to 31 October 2008 (plus the second period which is no longer the subject of these proceedings). The respondent subsequently conducted an audit and on 6 July 2011 advised the applicant that it was not entitled to claim R&D tax offsets as it had not incurred contracted expenditure under the terms of the agreement. The claimed R&D tax offset of $346,945.50 was disallowed. The respondent also assessed a GST shortfall of $92,518 for the period 1 October to 31 October 2008.

29. On 11 July 2011 the respondent assessed a GST shortfall penalty of $37,007.20 for the period in question. The respondent reduced the penalty by 20 per cent, pursuant to section 284-225 of Schedule 1 to the Act, for a voluntary statement made by Mr Morrey prior to commencing audit action.

30. The respondent also issued the applicant with a notice of administrative overpayment of $348,469.97, comprising of $346,945.50 for the R&D offset and $1,524.47 credit for interest, for the 2007-2008 income tax year. The respondent also issued a notice of assessment for the 2007-08 income tax year for a shortfall penalty of $174,234.95 on the basis of recklessness.

31. In November 2011 the respondent granted an 80 per cent reduction on the penalties relating to the GST shortfall, pursuant to section 284-225(3) of Schedule 1 to the Act, on the basis that the applicant made voluntary disclosure regarding its GST account prior to the commencement of the tax audit.

32. On 30 November 2012, the applicant made an application for review with this Tribunal.

Legislation

33. Section 284-15(1) of Schedule 1 to the Act provides:

  • (1) A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect.

34. Section 284-75(1) and (2) of Schedule 1 to the Act provide:

  • (1) You are liable to an administrative penalty if:
    • (a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law (other than the Excise Acts); and
    • (b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.

    Note: This section applies to a statement made by your agent as if it had been made by you: see section 284-25.

  • (2) You are liable to an administrative penalty if:
    • (a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under an income tax law or the MRRT law; and
    • (b) in the statement, you treated an income tax law, or the MRRT law, as applying to a matter or identical matters in a particular way that was not reasonably arguable; and
    • (d) item 4, 5 or 6 of the table in subsection 284-90(1) applies to you.

35. Section 284-80(1) of Schedule 1 to the Act provides:

  • (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
    Shortfall amounts
    Item You have a shortfall amount in this situation:
    1. A tax-related liability of yours for an accounting period, or for a taxable importation, or under the Superannuation (Unclaimed Money and Lost Members) Act 1999, worked out on the basis of the statement is less than it would be if the statement were not false or misleading
    2. An amount that the Commissioner must pay or credit to you under a taxation law (other than the Excise Acts) for an accounting period, or under a tourist refund scheme under Division 168 of the GST Act or Division 25 of the A New Tax System (Wine Equalisation Tax) Act 1999, worked out on the basis of the statement is more than it would be if the statement were not false or misleading
    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, or the MRRT law, as applying in a way that was not reasonably arguable
    4. An amount that the Commissioner must pay or credit to you under an income tax law, or the MRRT law, for an accounting period worked out on the basis of the statement is more than it would be if the statement did not treat an income tax law, or the MRRT law, as applying in a way that was not reasonably arguable

36. Section 284-90(1) of Schedule 1 to the Act relevantly provides:

  • (1) The base penalty amount under this Subdivision is worked out using this table and section 284-224 if relevant:
    Base penalty amount
    Base penalty amount
    Item In this situation: The base penalty amount is:
    1 You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from intentional disregard of a taxation law (other than the * Excise Acts) by you or your agent 75% of your shortfall amount or part
    2 You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a taxation law (other than the Excise Acts) 50% of your shortfall amount or part
    3 You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a taxation law (other than the * Excise Acts) 25% of your shortfall amount or part

37. Section 284-224(1) of Schedule 1 to the Act provides:

  • (1) If, apart from this section, you would have a base penalty amount because you or your agent treated a taxation law as applying in a particular way, and that way agreed with:
    • (a) advice given to you or your agent by or on behalf of the Commissioner; or
    • (b) general administrative practice under that law; or
    • (c) a statement in a publication approved in writing by the Commissioner;

    your base penalty amount is reduced to the extent that it was caused by that treatment.

38. Miscellaneous Taxation Ruling MT 2008/2 relevantly provides:

  • 28. The reasonable care test requires entities to take the same care in fulfilling their tax obligations that could be expected of a reasonable person in the position of the entity. This means that even though the standard of care is measured objectively, it takes into account factors such as the entity's knowledge, education, experience and skill.
  • 29. In contrast there is no personal aspect to the reasonably arguable position test as it applies an objective standard involving an analysis of the law and application of the law to the relevant facts. It is not a question of whether an entity thinks or believes that its position is reasonably arguable, but simply whether it is reasonably arguable. Having a reasonably arguable position is a further requirement that must be satisfied where the shortfall amount is above a specified amount for the income tax year. This approach is taken because the reasonable care standard on its own is seen as inadequate in large adjustment cases because of the personal considerations relevant to that test.

Consideration of Issues

39. It is necessary to deal with the GST and income tax shortfall penalties separately but it is nevertheless appropriate to commence by reviewing principles common to both.

40. As a threshold issue, the respondent referred to authorities in support of the contention - or to emphasise the fact - that the onus was on the applicant to show that neither it nor its agent had been reckless:
Hart v Federal Commissioner of Taxation [2003] FCAFC 105;
Federal Commissioner of Taxation v White (No 2) [2010] FCA 942. The Tribunal accepts this and does not consider this point to be contentious.

STANDARD OF CARE

41. The question of recklessness arose in the context of the applicant's inability to substantiate actual expenditure in the year ended 30 June 2008. The respondent accepted that the payments had been made in the year ended 30 June 2009. As the applicant put it, the question for the Tribunal was essentially whether it had been grossly indifferent to the timing of the deduction.

42. The applicant's primary contention was that if the liability to ThorSol had been incurred in the financial year ended 30 June 2008, then it had, by definition, exercised reasonable care in lodging its BAS.

43. The applicant's secondary contention, in effect, was that even if the applicant's liability to ThorSol had not been incurred in the year ended 30 June 2008, it had been reasonable, not reckless, for the applicant to have proceeded on that incorrect assumption.

44. It is helpful to take account of the observations by Cooper J in
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] ATC 4111 at paragraph 77 in relation to what constitutes recklessness:

Recklessness in this context means to include in a tax statement material upon which the act or regulations are to operate, knowing that there is a real, as opposed to fanciful risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true or correct, and a reasonable person in the position of the statement maker would see there was a real risk that the act or regulations may not operate correctly to lead to the assessment of the proper tax payable because of the context of the tax statement. So understood the proscribed conduct is more than mere negligence and must amount to gross carelessness.

45. In Hart, Hill and Hely JJ observed at paragraph 44:

There is a line between recklessness and dishonesty … Wherever a tax return includes deductions that are not allowable, a foreseeable consequence is that there will be a tax shortfall, particularly in a system of self-assessment. But, 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. … [Recklessness] means something more than failure to exercise reasonable care … but less than an intentional disregard of the Act.

46. The applicant referred to the comments of Senior Member O'Loughlin in
Re Bell v Commissioner of Taxation [2012] AATA 45 at [48] to [49] in support of the proposition that merely to adopt a different interpretation of the law to the Commissioner was not necessarily careless or reckless:

As long as positions adopted by the Commissioner are not universally or invariably correct, adopting a position that is contrary to a point of view expressed by the Commissioner does not necessarily demonstrate either carelessness or recklessness. Much depends on the issue in question, the facts of the case and the scope for genuine controversy as to the correct outcome. If there were no basis for contending that an amount was not assessable, adopting a position contrary to that of the Commissioner may well constitute recklessness. However, that is only one end of a spectrum. Adopting a position on a reasoned basis, while contrary to the Commissioner's expressed views, that has a sound rationale in relation to a topic of controversy might sit at the other.

47. To the extent that the applicant relied upon a tax agent, it is also pertinent to note that prior to 4 June 2010, pursuant to section 284-25 of Schedule 1 to the Act, a statement made by a tax agent in the approved form is treated as if it was made by the taxpayer.

48. The respondent referred to
Arnett and Ors v Federal Commissioner of Taxation 98 ATC 2137 in support of the principle that a professional person with specialist tax knowledge will be subject to a higher standard of care that reflects the level of knowledge and experience a reasonable person in those circumstances possesses.

49. In addressing the imposition of the shortfall penalties, and the amount of the penalties, it is necessary to consider the merits of the basis upon which the applicant originally claimed that the R&D expenditure was incurred in the financial year ended 30 June 2008.

50. The relevance of when the expenditure was incurred arises in the context of section 73B(13) of the Income Tax Assessment Act 1936 (the Assessment Act) which provides:

Subject to this section where an eligible company incurs contract of expenditure during the year of income, the amount of that expenditure multiplied by 1.25 is an allowable deduction for the company for the year of income.

51. The applicant contended that it was essentially a legal question as to whether the agreement between the applicant and ThorSol gave rise to an existing liability at the time of execution, and hence whether expenditure had been incurred during the financial year ended 30 June 2008.

52. Specifically, the applicant contended that an outgoing could be incurred without it being paid until a subsequent year. According to the applicant, the critical question was whether the outgoing was definitively committed. It referred to the terms of the agreement which obligated ThorSol to provide services from the commencement date of the agreement. The applicant submitted that the terms stipulated that ThorSol was entitled to make a progress payment claim, accompanied by a right of the applicant to reschedule but not cancel project activities.

53. The applicant further submitted that the question of when a liability was incurred was an area of genuine controversy. It was important to take account of the difference between monies due and monies payable. In the applicant's submission, this became a question of whether the applicant was definitively committed or completely subjected to the payment obligation.
Nilsen Development Laboratories Proprietary Limited & Ors v Federal Commissioner of Taxation (1981) 144 CLR 616 was cited in support of this proposition.

54. The applicant rejected the suggestion that consideration should be given to subsequent events or inferences to be derived from the payment arrangements. The only issue was whether, under the terms of the contract, the expenditure could be said to have been incurred in the income year ended June 2008.

55. The respondent contended that it was necessary to look at more than just the terms of the contract. It was also necessary to consider the circumstances surrounding the contract. The Tribunal indicated during the hearing that it agreed with the respondent on this point.

56. The respondent referred to
Commissioner of Taxation v Malouf (2009) 174 FCR 581 in which Sundberg, Jessup and Middleton JJ observed at paragraph 45:

Every contract must be construed according to the intention of the parties, and upon taking a legal or jurisprudential approach, the contractual arrangements and surrounding circumstances must be considered in determining when the loss or outgoing has been incurred.

57. Nevertheless, the soundness of the legal basis upon which the applicant proceeded remains a fundamental consideration to be taken into account by the Tribunal.

58. From the respondent's perspective, the surrounding circumstances turned very much on the state of mind of Mr Morrey. Mr Morrey was cross-examined as to the availability of funds for the applicant at the time it engaged ThorSol's services and Mr Morrey acknowledged that funding was to be a commercial stretch. He denied, however, that the applicant was dependent on receiving a tax refund for this purpose. The relevance of the issue, in the respondent's contention, was that the applicant was motivated to claim the expenditure as that had been incurred in the financial year ended 30 June 2008 and that this coloured its interpretation of its legal entitlement. Mr Morrey countered, however, that when I entered the arrangement I didn't know for sure whether or not I would be eligible for a tax concession.

59. The respondent cross-examined Mr Morrey on the bona fides of the payment arrangements with ThorSol and its expectations. Mr Morrey denied that he was told by Mr Dennis Clancy, representing ThorSol, that payment of the $1,017,706.80 invoice on 25 June 2008 was not expected within the 14 days stipulated on the invoice. The respondent's implication was that the applicant and ThorSol had an arrangement to defer payment until a tax refund had been received. Mr Morrey responded, however, that following receipt of the invoice, he had engaged CTC to determine how it should be treated from a tax point of view, and the advice was that payment was not due immediately. He said he did not know how much of a refund to expect, or when it would be received.

60. Mr Morrey denied that he had known at the time that CTC and ThorSol were related corporations. The respondent's implication was that CTC had a vested interest in the outcome of its advice. Mr Morrey responded that he did not know the two corporations were related until the tax audit subsequently took place.

61. Mr Morrey acknowledged that Mr Clancy of ThorSol had encouraged him to execute the contract prior to 30 June 2008. He also acknowledged that Mr Clancy was not a taxation expert. Mr Morrey gave the Tribunal the impression that he did what Mr Clancy advised him to do as to the most effective manner of processing his R&D claim, without giving thought to the funding implications of claiming expenditure in the 2007-2008 financial year.

62. Mr Morrey acknowledged that ThorSol did not invoice the applicant, for work performed in the latter part of 2008, until February 2009. That is, after the applicant received the income tax and GST refunds in October 2008 and January 2009 respectively. He agreed that the applicant used the tax refund to pay the invoices, but expressed ignorance as to why it had taken so long for ThorSol to submit the invoices, noting only that they were clearly trying to catch up. Mr Morrey denied knowledge of where GTSI had sourced the funds which it loaned to the applicant.

63. The respondent contended that the applicant had been reckless because it had failed to obtain independent advice. It contended that the advice received from Mr Clancy of ThorSol, and also from Mr John Clarke of CTC, was not independent because they had a vested interest in the tax offset claim and, in any event, neither of them was a tax expert. Given that CTC was not a tax agent, and given that a large sum was involved, the applicant should have acted with greater responsibility.

64. The applicant contended, in relation to the surrounding circumstances argument, that it was inappropriate to infer the meaning of an agreement from subsequent events. It was not relevant to have regard to subsequent payment arrangements when considering whether the applicant had incurred a presently existing liability under the terms of the agreement. The respondent countered by submitting that subsequent events were irrelevant to interpreting the intention of the parties, as opposed to interpreting the terms of the contract.

65. It is appropriate at this point to consider issues specific to each of the respective penalties.

GST

66. The question of whether the applicant relied upon advice received from the respondent is relevant to the GST claim only, by virtue of section 284-224 of Schedule 1 to the Act.

67. Section 284-224 provides that a taxpayer's base penalty is reduced to the extent that the taxpayer or its agent treated a taxation law as applying in a particular way which was consistent with advice given to the taxpayer or its agent by the Commissioner.

68. The applicant contended that it had relied upon the respondent's advice in two separate contexts.

69. The first context related to oral advice received on 16 September 2008, when an audit was conducted on the BAS lodged by the applicant in respect of the quarter ended 30 June 2008. The applicant asserted that it had relied upon oral advice from an officer of the ATO on 16 September 2008. The officer had advised the applicant to change its registration status to account on an accruals basis and then claim input tax credits for the quarter between 1 July and 30 September 2008 in relation to payments invoiced by ThorSol in this quarter. The BAS was subsequently lodged on the understanding that the applicant had accounted on an accruals basis. A note by the Commissioner stated:

I told him to contact registrations before end September, so they could change his client to accruals for the December tax period. He can then claim this tax invoice in his quarter or sooner if he pays it.

70. The second context arose in relation to written advice on 18 December 2008, being advice sent to the applicant's tax agent about the audit of the BAS for the quarter ended September 2008. It stated that:

… As we consider you have taken reasonable care, no administrative penalty applies.

…

  • • It is accepted that a misunderstanding occurred and it would be reasonable for you to prepare your BAS as you had based on these facts.

71. According to the applicant, it lodged its BAS for October 2008, and made its claim, directly after receiving this advice and as a consequence of this advice. It considered that it had effectively been advised to submit a BAS with the claim for input tax credits after it had changed its registration to an accruals basis.

72. The respondent's position was that whilst the applicant had received confirmation that the input tax credits claim was allowable at the time, this was purely from the perspective of its method of reporting GST on an accruals basis. It did not relate to whether the expenditure had in fact been incurred or whether the acquisitions were creditable under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999. The question of whether the applicant had a requirement to provide consideration for the services was beyond the scope of the respondent's review at the time of giving the written advice.

73. The respondent explained that it had never given advice to the effect that an input tax credit could be claimed if an amount had not been incurred. At the time, the Commissioner had simply been looking at the question of the timing of the claim, given that the applicant was operating on a cash basis, not an accruals basis. The respondent simply checked that the applicant had an invoice and did not consider the question of whether expenditure had in fact been incurred.

74. The respondent maintained that the applicant had been reckless in that it knew that the R&D activities were not due to commence until well into the 2008-09 income year and that it had not commenced paying ThorSol for the work until well into that income year. The respondent further noted that it was evident that a large portion of the funding of the applicant's R&D activities relied upon GST refunds are R&D tax offsets, which had been claimed well in advance of any actual R&D activity.

75. The respondent further explained that, given it had already granted an 80 per cent remission to take into account the voluntary disclosures made by Richard Morrey on 19 February 2010, there were no grounds for further remission.

Income Tax

76. The respondent asserted the applicant was reckless in claiming R&D offsets of $346,945.50 in the financial year ended 30 June 2008 and was therefore liable to a base penalty of $174,234.98. The respondent went on to assert that the applicant or its agent had made a statement that was false or misleading by asserting that the applicant was entitled to R&D offsets of $346,945.50 in the applicant's income tax return for the year in question.

77. The applicant's base penalty, determined under section 284-90 of Schedule 1 to the Act, was assessed by the respondent as 50 per cent of the shortfall amount on the basis that the shortfall resulted from the reckless behaviour of the applicant or its agent. At audit, the applicant failed to produce sufficient documentation and information to substantiate that the disallowed expenditure was incurred. It failed to substantiate that it had a presently existing liability to pay ThorSol.

78. According to the respondent, the applicant or its tax agent had been reckless because the tax agent should have been familiar with the requirement for an expense to be incurred. Furthermore, the respondent submitted that the relevant law was not ambiguous and a reasonable person should have exercised particular care due to the size of the R&D tax offset claimed.

79. The applicant's objection centred upon the fact that it had relied upon professional external advice from Deloitte Touche Tohmatsu (Deloitte) and its lawyers to the effect that the R&D tax offsets claimed in its 2007-08 income tax return, were allowable even though ThorSol's services were not to be provided until the 2008-09 income year. The applicant referred to a report of a Reasonably Arguable Position prepared by Deloitte on behalf of ThorSol on 20 January 2010 to the effect that it was reasonably arguable, but not beyond doubt that the applicant's expenditure had been incurred as at the date it entered into the agreement with ThorSol.

80. The relevance of a reasonably arguable position arises in the context of section 284-75(2)(b) of Schedule 1 to the Act, which provides that a taxpayer is liable to an administrative penalty if a taxpayer, or its agent, makes a statement to the Commissioner regarding the application of an income tax law in a particular way which is not reasonably arguable.

81. Section 284-15 of Schedule 1 to the Act states that a matter is reasonably arguable if it would be concluded in the circumstances, having regard to the relevant authorities, that the argument in question is about as likely to be correct as incorrect, or is more likely to be correct than incorrect.

82. The reasonably arguable test is addressed in Miscellaneous Taxation Ruling MT 2008/2. In paragraphs 28 and 29 a distinction is drawn between the reasonably arguable test and the reasonable care test. The former involves an objective analysis of the law and its application to the facts. The latter also involves a similar objective analysis but also takes into account factors such as the entity's knowledge, education, experience and skill to determine whether the efforts made by the taxpayer to determine its correct taxation position amounts to reasonable care.

83. The respondent's contention in this case was that neither the applicant nor its agent had a reasonably arguable position in respect of the R&D offset amounts claimed in the 2007-08 income tax year. Deloitte had been engaged by ThorSol to protect the applicant's interests but was not necessarily provided with all the relevant information about the agreement between the applicant and ThorSol. The respondent highlighted the observation in the report that we are not aware of the specific circumstances of the Client's [sic] of ThorSol, adding further the qualification that it is reasonably arguable, though not beyond doubt, that as of the date of entering into the Agreement the Client will have incurred contracted expenditure.

84. Taking into account the fact that the issue of whether expenditure is incurred has historically been disputed, the respondent questioned whether it was reasonable for the applicant to conclude that the case was reasonably arguable when applying the facts to its circumstances.

85. The applicant sought a remission on the basis that it had received advice from its legal advisers, which did not indicate that there was an issue as to whether the R&D expenditure had been incurred. The applicant submitted that if the applicant had been advised there was an issue, it would have made a voluntary disclosure. To this, the respondent countered that the applicant, or its advisers, should in fact have been aware of the risk that the R&D expenditure had not been incurred.

86. In justification of the 50 per cent penalty, the respondent pointed to the significance of the fact that the R&D tax offsets claimed was made in the financial year ended 30 June 2008 even though the company had only been registered on 26 June 2008. The respondent's implication was that, at the time the R&D tax offsets were claimed, the applicant had insufficient funds to meet the R&D expenditure which had in any event not yet commenced. It was significant, in the respondent's contention, that the R&D tax offsets claimed would give the applicant immediate access to funding in the form of tax offset concessions.

87. It was also relevant, in the respondent's contention, that the applicant's tax agent could have done more to verify the nature of the ThorSol invoices. The respondent further contended that the tax agent could have done more than rely on the advice from Deloitte, which had been commissioned by ThorSol and which was prepared without access to all relevant facts.

88. The applicant contented that it took reasonable care in preparing its 2007-08 income tax return, relying on advice from a range of consultants. The respondent countered this response by submitting that a taxpayer is liable for a statement made by its tax agent, adding that in this case the applicant engaged two tax agents, Horizon Accounting and McCorquodale Group. The mere use of a tax agent did not mean that a taxpayer entity discharged its obligation to take reasonable care.

89. The respondent referred to the agreement between the applicant and CTC which stipulated that responsibility for lodging the Company Tax Return remained with the applicant's accountant or tax advisers. The respondent further referred to correspondence from AusIndustry which emphasised that registration by the Board did not imply that expenditure incurred in relation to R&D activities were eligible for concessional treatment, and that determination of eligibility was the responsibility of the customer under self-assessment.

DECISION

90. The Tribunal is required to determine whether the applicant is liable to shortfall penalties under section 284-75 of Schedule 1 to the Act. If so, The Tribunal is required to consider whether the applicant's conduct involved recklessness for the purposes of Item 2 of section 284-90(1) or whether it involved a failure by the applicant or its agent to take reasonable care for the purposes of Item 3 of section 284-90(1).

91. The Tribunal considers the applicant is liable to shortfall penalties with respect to the GST shortfall and income tax shortfall for the periods in question. In this regard, it does not accept the applicant's contention that the applicant's liability was incurred, as that term is used in the legislation, in the financial year ended 30 June 2008. The applicant did not, in the year ended 30 June 2008, incur an outgoing, as opposed to an obligation to pay a future outgoing.

92. While the Tribunal accepts that there is, and has for some time been, legal uncertainty about when a liability is incurred, the applicant does not escape a penalty on this basis alone. Similarly, it is not sufficient that the applicant obtained advice from a range of sources to the effect that it was proceeding in a legally defensible manner. The issue is, in part, whether and to what extent it was reasonable for the applicant to rely upon, and interpret, this advice in the context that it was received.

93. In this regard, the advice received by the applicant from representatives of ThorSol and CTC should have been qualified by the existence of an inherent conflict of interest, and the reasonably arguable opinion advanced by Deloitte was itself expressly qualified. A reasonable person in Mr Morrey's position should have made further enquiries.

94. Accordingly, the ultimate issue for determination by the Tribunal is whether it was appropriate for the applicant's conduct to be properly categorised as reckless or whether it was more appropriately categorised as a failure to take reasonable care.

95. The impression formed by the Tribunal of Mr Morrey was that he was not indifferent to the applicant's tax obligations. He acted responsibly, or believed he was acting responsibly, in seeking professional advice, even if he was in some respects naive as to potential conflicts of interest amongst some of those advisers.

96. Naivety, or an innocent mistake, does not of itself avoid liability to a penalty but, in the absence of complete indifference, it may be sufficient to categorise a taxpayer's conduct as a failure to take reasonable care, as opposed to being reckless. This is the Tribunal's assessment of Mr Morrey and of the applicant. Mr Morrey was aware that he needed to obtain advice and he considered it was appropriate to rely on the advice which he obtained. He had an additional obligation, however, to exercise a degree of professional judgement and, indeed, common sense, when interpreting the advice, the context of that advice and the ramifications of that advice.

97. With respect to the GST claims specifically, the Tribunal does not consider the applicant relied upon advice received from the respondent in the context of section 284-224 of Schedule 1 to the Act. Nevertheless, the Tribunal is prepared to accept that Mr Morrey genuinely misinterpreted, or incorrectly extrapolated, the information which he received from the ATO.

98. For the above reasons, the Tribunal does not consider that the applicant displayed recklessness in its conduct. The Tribunal accepts, nevertheless, that there was a failure to take reasonable care.

99. The Tribunal accordingly sets aside the respondent's decision to impose shortfall penalties at the rate of 50 per cent and substitutes a penalty of 25 per cent of the shortfall amount for failure to take reasonable care in the GST period ended 31 October 2008 and the income tax year ended 30 June 2008.


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