Case P122

Judges:
HP Stevens Ch
JR Harrowell M
BR Pape M

Court:
No. 1 Board of Review

Judgment date: 15 December 1982.

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H.P. Stevens (Chairman)

The questions for decision in this reference are the same as in the jointly heard reference No. 126/1982 ( Case P121,
82 ATC 611 ), viz. - whether the provisions of sec. 226(2) apply and, if so, whether there should be a greater remission of the penalty imposed thereby than made by the Commissioner.

2. A medical practitioner being concerned about his taxation and having heard of the Curran decision approached his accountant who referred him to a promoter of ``Curran'' arrangements. He attended the promoter's offices on 31 March 1978, had the arrangements explained (anticipated profits plus a taxation advantage) gave the

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ATC 624

promoter two cheques (one for $500 and the other for $2,500) and signed various documents. The $2,500 was to a nominee company as an introduction fee and the agreement entered into with that company provided for the overall arrangements producing an allowable deduction of $50,000 with a further $5,000 to be paid after $50,000 had been allowed. The $500 was his contribution to a partnership (19 other partners) - agreement dated 31 March 1978 - with a manager appointed to conduct the affairs of the partnership. The taxpayer did not expect to be involved in any way or to have to contribute any additional amounts to the partnership.

3. A first and final return for the partnership was lodged dated 30 October 1978. This revealed that the partnership ceased on 23 May 1978 and that it had been involved in a minimal number of transactions in shares listed on the stock exchange for a gross profit of $133.55. It also revealed a transaction in shares of the same private company as in reference No. 126/1982 ( Case P121, 82 ATC 611 (Goanna Explorations Pty. Ltd.)) - 13,133,302 ``bought'' for $14,824,187 and (after a bonus issue) 14,133,302 ``sold'' for $14,824,237. The $50 ``profit'' increased the overall gross profit to $183.55 which, after $16 dividends and expenses $254.83, yielded a financial loss of $55.28. For taxation purposes a deduction was claimed for $1,000,000 being the ``cost'' of the 1,000,000 bonus shares in the private company to give a net loss for the partnership of $1,000,055.28 with the taxpayer's share thereof being $50,002.76. On the cessation of the partnership the taxpayer received a cheque for $497.24, i.e. the $500 contribution less $2.76, his share of the financial loss of $55.28.

4. In his return of income for the year ended 30 June 1978 dated 14 December 1978 (lodged under extension of time to 31 December 1978) the loss of $50,003 was taken into account in arriving at his returned taxable income of $15,275. The taxpayer said he was aware of the amendments to the Act in relation to ``Curran'' schemes but that he was obliged to disclose all details of his transactions for the year in his return even though he thought the arrangement was, as a result of the amendments, defeated. By letter of 17 January 1979 his agents wrote referring to his return and the obligation to disclose all details therein and concluded thus:

``Since then it has come to his knowledge that you consider such losses to be non-allowable and therefore subject to penalty provisions of the Act. In view of this he wishes to now amend his return to the correct position which he believes you consider it to be, namely $67,214.''

This figure of $67,214 representing the returned $15,275 + $50,003 + $1,936 - the latter figure being a correction of another partnership loss shown in the return as $3,076 to a loss of only $1,140.

5. By notice of assessment dated 23 March 1979 the taxpayer was assessed on a taxable income of $67,204 - the Commissioner reduced the loss of $50,003 not to nil as per the letter of 17 January 1979 but to $10 - and in this assessment ``additional tax for incorrect return'' of $14,926.38 was included. Such additional tax related to the $49,993 adjustment only (not to the other $1,936 as well) and represents 50% of the tax applicable thereto, i.e. the Commissioner remitted 75% of the 200% imposed by sec. 226(2). A lengthy questionnaire issued with the notice of assessment and this was replied to on 6 April 1979. The assessment was objected to by notice of 10 April 1979 (see following paragraph) and the taxpayer paid the tax assessed (excluding the additional tax) by the due date. He attended the Taxation Office pursuant to a formal sec. 264 notice on 6 December 1979 and co-operated thereat. The objection was disallowed on 6 August 1981 and a request for reference to a Board of Review followed. By reason of a credit arising from a later year's assessment $4,000 of the additional tax at issue has been ``paid'' by way of the credit being set off by the Department against the outstanding balance in respect of the additional tax.

6. The notice of objection lodged consisted of the same 28 grounds as for reference No. 126/1982 ( Case P121, 82 ATC 611) and, as in that reference, all claims other than those set out in grounds 9 to 15 inclusive were abandoned at the hearing - see para. 7 of reference No. 126/1982 ( Case P121).

7. In the other reference I have dealt with the question of the general applicability of

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the provisions of sec. 226(2) - see para. 9-14 thereof - and I will not deal with this again. I adopt what was said therein for the purposes of this reference also. In this reference a further argument in relation to the applicability of sec. 226(2) was advanced. It was that by his letters of 17 January 1979 he had amended the return initially lodged so that by the time it was assessed it did not contain a claim for deduction of the loss share of $50,003. Counsel contended that there was no definition of a return and that it should be regarded as the aggregate of documents lodged by a taxpayer before his assessment is made for the purpose of enabling the Commissioner to make such assessment. Therefore there was nothing in respect of which sec. 226(2) could operate. Counsel for the Commissioner contended however that there being no provision for the lodgment of an amended return the Commissioner in considering whether the section applied could only have regard to the initial return actually lodged. This return had claimed the ``offending'' deduction so that the section applied. The letter withdrawing the claim could neither alter the initial return nor prevent the section applying - the most that could be said for it was that it would be a fact to take into account in considering in the course of assessment the degree of remission to be granted by the Commissioner.

8. The question of what constitutes a return - particularly in the context of sec. 69 - has been before the Board previously (see Case N57,
81 ATC 282 and
Parrott v. F.C. of T. 82 ATC 4085 ). I have no doubt that, for sec. 69 purposes, the document dated 14 December 1978 is the ``return'' of the taxpayer. However, despite the absence of provisions for the lodgment of amended returns, I would be inclined to the view that, for sec. 226(2) purposes, the return as originally lodged can be altered so that it is that ``adjusted'' document which is before the assessor when he ``raises'' an assessment. If at the time of assessment no offending claim is being put forward it seems far more logical for sec. 226(2) not to apply rather than to say that it does and then to use the ``adjustment'' in the course of considering a remission of the penalties thereby imposed.

9. Turning now to the second issue of whether there should have been a greater remission by the Commissioner counsel for the taxpayer contended that a penalty of 50% of the tax was disproportionate in relation to the ``offence'' in the light of the published guidelines concerning penalties - see Australian Federal Tax Reporter , Vol. 5, ¶ 86-155 Remission of Additional Tax. He also submitted that, irrespective of this reason, he could not think of a stronger case for total remission than that of the taxpayer. The taxpayer had ``amended'' his return well in advance of an assessment and the revenue was not at risk - whilst he was co-operative in all respects (even to the extent of payment of the ``primary'' tax assessed by the due date).

10. Counsel for the Commissioner made no submission to the Board in relation to the question of remission - something that the taxpayer's counsel said was most significant.

11. In my view, if sec. 226(2) applies, the penalty imposed thereby should be wholly remitted. Whilst it can be said that ordinarily an ``offence'' is committed at the date thereof (here it would be said to be the date of lodgment of the initial return) and is ``punishable'' having regard to the intent, etc., existing at that date, I think in taxation matters under sec. 226(2) the important element is an actual or threatened loss of taxation revenue by the normal due date thereof. ``Actual'' when, say, assessable income is omitted or ``threatened'' when, say, an overclaim is made in a return (which overclaim may or may not be detected upon assessment). In the present case there was no actual or threatened loss as the offending claim no longer existed as at the time of assessment - such time being what might be regarded as normal for the taxpayer's 1978 assessment.

12. For the reasons expressed above I would reverse the Commissioner's decision on the objection insofar as it relates to additional tax and would amend the taxpayer's assessment for the year ended 30 June 1978 to exclude the additional tax of $14,928.38.