ARNETT & ORS v FC of TJudges:
BH Pascoe SM
Administrative Appeals Tribunal
BH Pascoe (Senior Member)
This is an application for review of a decision of the respondent to disallow an objection to amended assessments of income tax based on income for the year ended 30 June 1996. The issue in dispute was the imposition of additional tax under section 226G of the Income Tax Assessment Act 1936 (``the Act''). As the facts and issue in dispute was identical in six applications, the applications were heard together by consent.
2. At the hearing the applicants were represented by Mr F Brass of H & R Block Limited, the applicants' tax agent, and the respondent by an officer of the respondent. Evidence was given by another officer of the respondent who is currently acting in the position of Returns Processing Manager in an office of the respondent.
3. The facts of these matters were not in dispute. Each of the applicants had been employed by Coliban Regional Water Authority (``Coliban'') during the relevant year. Coliban made a decision to outsource its labour requirements and the employment of each of the applicants was terminated. Group certificates were issued to the applicants showing lump sum payment amounts under the description Lump Sum A. This heading describes payments representing unused long service and annual leave applicable to periods after 16 August 1978. Coliban sought a private ruling from the respondent regarding payments made to staff whose employment had been terminated and, in particular, the relevance of section 27F of the Act. This section defines the circumstances in which an eligible termination payment will be regarded as a bona fide
ATC 2139redundancy payment and either exempt or subject to concessional tax treatment under section 159SA. The respondent did not consider the matter as being one in which a private ruling could be given but provided a letter, dated 4 June 1996, setting out the terms of section 23F. On 29 July 1996, the Manager Economic Services of Coliban wrote a letter to Serco which had employed a number of the ex- Coliban employees. This letter stated:
``Re: Advice to employees re Income Tax Returns - treatment of tax on leave on termination.
By letter dated 4 June 1996, in response to our enquiry, Mr L.G. Appleton, Deputy Commissioner of Taxation, advised that employees leaving the employment of Coliban Water and taking up employment SERCo, where leave entitlements have been paid out, could receive confessional [sic] treatment of that payment under Section 27F of the Income Tax Assessment Act.
Please advise effected [sic] staff to quote this response when completing Income Tax Assessments for 1995/96.''
Two of the applicants had lodged their income tax returns including the lump sum payment as shown on the group certificate. After receipt of this letter, the tax agent requested an amended assessment. The request included the following statement:
``Mr L.G. Appleton advised employees leaving the employment of Coliban Water and taking up employment with Serco could receive concessional treatment of that payment under section 27F of the Income Tax Assessment Act. Therefore the amount of [$14,814 for one applicant and $8,802] for the other shown as Lump Sum A should not be included.''
Returns for the remaining four applicants were lodged after 31 August 1996 and the lump sum in the returns was included as Lump Sum D. An attachment was included with each return with the wording for two being:
``Mr L.G. Appleton advised employees leaving the employment of Coliban Water and taking up employment with Serco could receive concessional treatment of that payment under section 27F of the Income Tax Assessment Act. Therefore the amount of [$14,615 for one applicant and $8,910 for the other] shown as Lump Sum A has not been included.''
The wording on the attachment to the third return was:
``As per advice from your office Coliban Water employees have been advised not to include Lump Sum A amounts on there [sic] income tax returns. If you have any further enquiries please contact Jim Tonkin at H & R Block Bendigo (054) 416503.''
For the fourth return the wording on the attachment was:
``As per communications between the ATO and Coliban Water it would appear that the amount shown on group certificate at Lump Sum A should be shown at Lump Sum D and therefore non taxable. If you need any more information re the above could you please contact the writer Jim Tonkin at H & R Block Bendigo on 054 416503.''
The amended assessments and assessments were issued subsequently based on the amounts being bona fide redundancy payments and exempt.
4. After a subsequent audit performed by the respondent following advice that some ex- employees of Coliban may not have treated lump sum payments correctly in their income tax returns, the respondent issued amended assessments to the six applicants to assess the lump sums as payment for unused leave and not bona fide redundancy. Additional tax equal to 25% of the tax shortfall was imposed by way of penalty under section 226G of the Act. This section applies where a tax shortfall was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with the Act or the regulations. The applicants do not dispute that these amended assessments correctly assessed the lump sum but do dispute the quantum of the additional tax.
5. The Returns Processing Manager gave evidence that where a return lodged electronically (as these were) shows an ``attachment'', the system takes the return off line and stores it in an electronic bin. Each day a returns processing officer views these ``edit errors'' stored in electronic bins, reviews the attachment and, if it seeks resolution of a question, forwards it to the ``advisings'' section. If no further action is required, the return is put back on line for processing under the principle of self assessment. Electronically
ATC 2140lodged amendment requests are similarly processed. His view was that the wording of the amendment requests and the attachments to returns would not have alerted a returns processing officer to a requirement of any further action. He accepted that it was always possible that matters which should be dealt with separately, where questions are raised, were not referred on for further action.
6. It was submitted by Mr Brass that reasonable care was taken in relation to these applicants' returns and that the penalties should not have been imposed. He said that when the copy of the letter from Coliban was produced in August 1996, the view was taken that the group certificates may have been incorrect. It was considered that as the six employees had been employed by Coliban from between 5 years and 19 years that redundancy payments could have been expected. He said that attempts to contact Coliban were of no avail as Coliban had ceased employment and were not interested in the matter and Serco advised that it could not help. Mr Brass maintained that, as a result, the use of the attachment to the four returns and the two amendment requests was to have the respondent resolve the matter. He said that the tax agent was under pressure to have the returns lodged and that the particular practice lodged some 5000 returns. He considered it reasonable to believe that some redundancy payments would have been made and, as the tax agent was unable to verify this, the attachments would draw the matter to the specific attention of the respondent. He said that a survey of the H & R Block network of franchisees had resulted in 63% out of 35 responses agreeing that the appropriate action in a position such as this would be to lodge the return with the amount changed to ``D'' and advise the ATO by the other attachment ``field''. Mr Brass believed, also, that, as a result of many attachments being included with 1996 returns relating to claims for Medicare Levy exemptions, that inadequate attention was given to attachments to returns that year.
7. It was submitted for the respondent that the applicants or their tax agent had failed to take reasonable care. The respondent accepted that doubt on whether or not the applicants received a bona fide redundancy payment led to the use of the attachments but argued that they were statements not questions or requests for opinions, constituted a major change in description of income and did not indicate to the respondent that any further action was required. It was submitted that if real doubt had existed, the attachments should have been worded in a more equivocal way and requested consideration and advice. It was said that a higher degree of care is expected from a tax agent than an individual taxpayer with little experience or understanding of the law. It was not accepted that the letter from Coliban would lead a person with experience, skill and understanding of income tax law to assume that the total amount shown as Lump Sum A could qualify under section 27F which specifically includes, as a bona fide redundancy payment, only such amount of an eligible termination payment as exceeds the amount that could reasonably be expected to have been made as a consequence of voluntary retirement.
8. The additional tax imposed by way of penalty under section 226G of the Act applies where there is a failure to take reasonable care. ``Reasonable care'' is not defined but the explanatory memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992, which introduced the section into the Act, states that: ``The effort required is one commensurate with all the taxpayer's circumstances, including the taxpayer's knowledge, education, experience and skill.'' In a decision of this Tribunal, reported as Case 34/95,
95 ATC 319, the Tribunal stated (at page 324):
``Given that the taxpayer's return was prepared by experienced tax agents, who objectively should have known, or at the very least, had the resources to find out, the requirements in respect of the deduction of superannuation contributions... it is difficult to find that reasonable care has been experienced.''
In these cases the tax agent had six former employees of Coliban whose employment had been terminated during the year of income. The evidence was that the agent had a further nine clients in the same position whose returns were lodged in July and early August 1996. After receipt of the copy of the letter from Coliban, it was thought likely that some of the former employees could have received a redundancy payment. However, they did not ask a question of the respondent or request the respondent to obtain information that they had not been able to obtain. The attachments and requests for amendment made a positive statement. There
ATC 2141were, effectively, four variations in the wording used. The requests for amendment and attachments stated ``the amount... shown as Lump Sum A should not be included'', ``employees have been advised not to include Lump Sum A amounts on there [sic] income tax returns'' or ``the amount shown on group certificate at Lump Sum A should be shown at Lump Sum D and therefore non taxable''. All of the statements referred to advice from the office or an officer of the respondent. I am unable to perceive how any returns processing officer see the attachments as anything other than an explanation of a difference between a group certificate detail and the income tax return with the group certificate being incorrect. I cannot accept the submission by Mr Brass that the wording used could be seen in any way as seeking resolution of a doubt on the way in which the lump sums should be taxed. They were excluded from assessable income in the returns lodged and the wording of the attachment stated the alleged reason why this was correct. To make the statements which were made on the basis of a letter which said that employees ``could receive'' concessional treatment under section 23F does not appear to me to indicate a tax agent taking care to have his clients comply with the Act. While the taxation of termination payments has changed on a constant and regular basis over recent years the position with bona fide redundancy payments is not particularly complex. Section 27F was inserted in the Act in 1984 and has always defined a bona fide redundancy payment in the same way. Prior to 30 June 1994, only 5% of a bona fide redundancy payment was included in assessable income. In relation to payments after that date, section 27CB exempts payments up to the tax-free amount set out in section 27A(19) and any balance may be subject to a rebate under section 159SA. On what basis the letter from Coliban could be seen as saying, or even implying, that the lump sums shown as A on the group certificate should be exempt under section 27CB completely escapes me. I can understand that the question might be raised but, in the absence of any further details, that is how it should have been treated - as a question. The tax agent should have been expected to know or, a least, found out about possible treatment of the lump sum payments. It is unreasonable to have assumed that no amounts should be included as Lump Sum A.
9. Mr Brass stated that it had been the intention of the tax agent to review all of the returns of former Coliban employees in October or November 1996 when the peak lodgment period had passed but that the commencement of the respondent's audit intervened. He said that the tax agent did not rely on the Coliban letter as demonstrating reasonable care but believed that the bringing to the respondent's attention that, maybe, there were problems with the group certificates and taking pains to highlight the matter did demonstrate reasonable care. He admitted that the expectation of bona fide redundancy payments was in error. As indicated I am firmly of the opinion that the tax agent did not suggest any problem or suggest any doubt in the requests for amendment or the attachments to the returns. The whole basis of self assessment is the acceptance by the respondent of statements made in returns lodged and requests for amendment. This, in turn, has led to the regime of penalties when such statements turn out to be incorrect.
10. In my view the tax agent clearly failed to take reasonable care to comply with the Act so as to attract the penalty imposed by section 226G. Equally, the same penalty could have been imposed under section 226K as the shortfall being caused by a statement that was not a reasonably arguable position. The statements made could even be seen as verging on recklessness of the tax agent so attracting the higher penalty of section 226H. I accept the practice was a busy practice and the tax agent took a short cut to deal with a possible issue, perhaps with the view of taking more time later to confirm the actual position. It is understood that the tax agent has met the cost of the penalties imposed and, unfortunately perhaps, must bear the result of a wrong decision to deal with the matter in the way in which it was done. Hopefully, and as indicated by Mr Brass, future attachments to returns by the tax agent will be more carefully framed. In this case I see no grounds for any remission of the penalty pursuant to section 227. Mr Brass suggested that no penalty should be imposed as the matter involved a disclosure in writing prior to the audit and section 226E provides relief. As this section applies only to additional tax under a scheme section, it is assumed that he was thinking of section 226Z. In any event, the disclosure referred to did not tell the respondent about a tax shortfall but itself created the
ATC 2142shortfall and, clearly, has no application to this matter.
11. It follows from the foregoing reasons that the decisions under review are affirmed.