Keitac Pty Ltd ATF Mcnamara Property Development Trust v Commissioner Of Taxation

[2007] AATA 1206

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• The impact of this case on ATO policy is discussed in Decision Impact Statement: Keitac Pty Ltd and Commissioner of Taxation (Published 30 July 2007).

(Decision by: Dr KS Levy, RFD Senior Member)

Re: Keitac Pty Ltd ATF Mcnamara Property Development Trust (Applicant)
vCommissioner of Taxation (Respondent) (No QT2006/329)

Tribunal:

Member:
Dr KS Levy, RFD Senior Member

Subject References:
TAXATION
penalty imposed for input tax credit claimed in Business Activity Statement
margin scheme special condition inserted into contract
whether penalty was lawfully imposed
whether penalty was correctly calculated
whether penalty should be remitted
Explanatory Memorandum to A New Tax System (Tax Administration) Act (No 2) 2000 considered
Practice Statement Law Administration PS LA 2006/2 considered
whether applicant exercised reasonable care
whether Tax Agent exercised reasonable care

Legislative References:
Taxation Administration Act 1953 (Cth) - ss 14ZZK; 284-25; 284-75; 284-90; 298-20
Administrative Appeals Tribunal Act 1975 (Cth) - ss 29; 37
A New Tax System (Goods and Services Tax) Act 1999 (Cth) - ss 9-5; 29-10; 75-20

Case References:
Commissioner of Taxation v Hornibrook - [2006] FCAFC 170
Graham Docker and Associates Pty Ltd and Commissioner of Taxation - 61 ATR 1077
Smith v Jones - [1954] 2 All ER 823
Taylor v Johnson - (1983) 151 CLR 422
Solle v Butcher - [1950] 1 KB 671
Goldsbrough Mort and Co Ltd v Quinn - (1910) 10 CLR 674
Re Sparks and Federal Commissioner of Taxation - [2000] AATA 28
Re Arnett and Federal Commissioner of Taxation - 39 ATR 1095
Re Kowadlo and Kowadlo and Commissioner of Taxation - [2004] AATA 786
Starr v Commissioner of Taxation of the Commonwealth of Australia - [2007] FCA 23

Other References:
Practice Statement Law Administration PS LA 2006/2
Explanatory Memorandum to A New Tax System (Tax Administration) Act (No 2) 2000
TR 94/4

Hearing date: 24 January 2007
Decision date: 4 April 2007

Brisbane

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Decision by:
Dr KS Levy, RFD Senior Member

CORRIGENDUM [2007] AATA 1206 - WHEREAS the Decision and Reasons for Decision dated 4 April 2007 read that the Tribunal was sitting as the Small Taxation Claims Tribunal, THE TRIBUNAL NOW DIRECTS that the heading should read 'TAXATION APPEALS DIVISION.'

INTRODUCTION

1. The applicant in this matter is Keitac Pty Ltd as Trustee for McNamara Property Development Trust. The applicant is a property developer.

2. The applicant is limited in this application to the grounds stated in the Taxation objection dated 10 February 2006 (s 14ZZK of the Taxation Administration Act 1953 ) unless otherwise ordered by the Tribunal ( Commissioner of Taxation v Hornibrook [2006] FCAFC 170).

3. Following negotiations and completing a contract for the purchase of land, the applicant, through his accountants submitted a Business Activity Statement (BAS) and claimed an input tax credit in November 2005. In December 2005, the Tax Office reviewed the transaction, determined that no input tax credit was claimable, and issued a penalty of $23,863.75 for failure to take reasonable care to comply with taxation law. The applicant objected to this assessment but the objection was disallowed. The applicant then made an application to the Administrative Appeals Tribunal on 14 August 2006 for a review of that decision under s 29(1) of the Administrative Appeals Tribunal Act 1975 .

4. The applicant was represented by Mr Stephen Toohey, one of the principals of Toohey Reid, the firm of accountants engaged by the applicant. The respondent was represented by its Advocate, Mr Kevin O'Seighin.

ISSUES

5. The following issues must be determined by the Tribunal:

a.

Whether the imposition of the administrative penalty of 25% of the shortfall amount was lawfully imposed?

b.

Whether the quantum of penalty ($23,863.75) was correctly assessed?

c.

Whether the discretionary decision not to remit the penalty was the correct or preferable decision?

EVIDENCE

6. The following documents were admitted into evidence:

•

Exhibit 1: T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 ;

•

Exhibit 2: Supplementary T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 ;

•

Exhibit 3: Statement of Anthony Tuite dated 30 October 2006

•

Exhibit 4: Statement of Paul McNamara dated 30 October 2006 (including copy of the unsigned contract)

•

Exhibit 5 Record of the sales history of the applicant from the official records of the Department of Natural Resources

7. The background facts to this application are that in June 2005, the applicant was in negotiations to purchase two blocks of land (lots 9 and 10) at Schrodter Road, Wamuran, for the purpose of property development. The price at that time was $1,050,000. The land was then used for farming purposes.

8. The applicant sought advice from his accountants in relation to which entity the property should be purchased in; and secondly, whether the applicant company could access the going concern exemption with respect to GST in respect of the purchase of those properties. In respect of his second question, the accountants advised him that he was not so entitled. That was in June 2005.

9. The applicant agreed to a draft contract, subject to amendment of the purchaser's official name shown on the contract. He subsequently entered into a contract in July 2005 but a special condition had been mistakenly inserted. The applicant was not aware of the existence of this condition at the time of signing the contract and indeed, he was not aware of it until December 2005. Consequently, the applicant did not advise his accountants of this term of the contract. He also did not refer the contract to the accountants before the contract was entered into or before settlement.

10. In November 2005, the Tax Agent (Toohey Reid, Chartered Accountants) prepared a Business Activity Statement (BAS) for the period ending 30 September 2005 and claimed an input tax credit of $95,455.00 in respect of the purchase.

11. Evidence was provided by Mr Paul McNamara, a Director and Principal of the applicant company, and by Mr Anthony Tuite of the firm of Toohey Reid, who was the accountant responsible for preparation of the relevant BAS in this matter. Mr Stephen Toohey was also sworn as he provided evidence from the Bar table in the form of submissions based on instructions from the applicant and his personal knowledge and involvement with the facts.

•     Mr Paul McNamara

12. Mr McNamara attested to his statement (Exhibit 4) and that it was true and correct.

13. In cross-examination, he stated that he was Trustee for the McNamara Property Trust which was created in early 2005 for the purpose of undertaking the business of property development. The property Trust was registered for GST on 1 June 2005.

14. Mr McNamara has experience in purchasing land. He had purchased about 28 properties previously and had signed contracts in respect of each of these. He also provided oral evidence that he has always been careful in reading contracts, and particularly in respect of lot numbers and prices. If there was a doubt, he would refer any issues to his solicitors. He also stated that he knows what the margin scheme is. He was aware that under that scheme he could not claim an input tax credit. He also referred to the first (unsigned) contract which was prepared and which had no special condition attached. However, the name was incorrect in that it did not include the company, Keitac Pty Ltd, as Trustee for McNamara Property Trust. As a result, the contract had to be amended to insert the correct name. When it was returned to him for signature, he did not notice the special condition inserted. Mr McNamara could not recall whether the special condition was inserted at the time he signed it. He was not claiming fraud as he did not know whether it had been inserted after the contract was entered into or not. His usual practice was to initial changes to contracts but he relied on the advice of the Real Estate Agent as to the practice to be adopted. He accepts that he did not read or check the contract sufficiently when the final came back for signature with the purchaser's name amended. He trusted the Agent who was a family friend. The contract was executed on 16 July 2005 and settlement occurred on 28 August 2005.

15. The applicant asserts that he took reasonable care but also claimed that there was an element of trust in his carrying out his work for the Trust - he used solicitors and financiers and others in the process of purchasing properties. While he understood the meaning of the margin scheme, he said there was some misunderstanding about the Goods and Services Tax (GST) not only on his part but also by other developers and by Real Estate Agents in the property industry. He did not intend to have a clause in the contract in which he purchased under the margin scheme as he understood its effect.

16. In November 2005 his accountants contacted the applicant company and asked for the "key terms" of the contract. He said he did not understand the meaning of those words but agreed that the margin scheme would be a key term. The accountants then requested a copy of the contract. The request was received by his Secretary and she faxed back the front page of the contract to the accountants. He indicated that if he had been faxing the contract, he would have sent the two pages of the contract and the conditions.

17. When asked whether it would have been reasonable for him to have read the contract between signing the contract and when the BAS was prepared in November 2005, he replied "no". He said he did not read the contract in that time nor had he any reason to do so.

18. In re-examination, Mr McNamara said that he was not aware of the existence of the special condition until his accountants had been contacted by the Australian Taxation Office (ATO) and when the matter was then raised with him. He said that he cannot check every aspect of his company's work and relies on sub-contractors and others to a large degree. He also relied on his Secretary who had worked for him for ten years. He agreed that he signed a number of documents each day and also signed cheques, although he said that he did not check these before he signed them.

19. In relation to the special condition in the contract, he said he would usually initial special conditions but that he would generally comply with what a Real Estate Agent requested of him. He could not recall whether he had read page 2 of the contract (where the special condition had been inserted) although he had initialled the pages of the contract. The agent did not point out the special condition in the contract which, he said, would have been the usual course. He also noted that he had signed contracts with special conditions in the past and some of these had the conditions attached as separate annexures.

•     Mr Anthony Tuite

20. This witness said he would never advise somebody in the applicant's situation in relation to a margin scheme as it created disadvantages for the purchaser. He said he was the accountant who was responsible for preparing the BAS for Keitac Pty Ltd and two other entities. His duties involved preparing management accounts and undertaking reconciliations. He was also required to determine which transactions were subject to GST and which were not. When asked whether he ever checked tax invoices he said "no". He did not regard any transactions in the applicant's BAS for the relevant period as being extraordinary. He also noted that the transaction was consistent with the advice given by Toohey Reid some five months earlier.

21. Under cross-examination, the witness stated that he held a Bachelor of Commerce degree and had eight years experience working as an accountant. He acknowledged Mr Toohey in the firm of Toohey Reid was a tax specialist and that there were other tax specialists also in that firm from whom he could have sought advice. The witness said he also worked in the Taxation Division of that firm.

22. In relation to the BAS for the period ending 30 September 2005, the witness agreed that it was incorrect in hindsight. He requested "key terms" of the contract from the applicant company and other information for the applicant's group as a whole. However, he had the purchase price at that time and he said that was all that was required to complete the BAS.

23. He requested a copy of the contract and only the first page was faxed by the company. He did not get page 2 which showed the special condition, nor did he follow up the matter to seek a copy of it. He thought that it was unnecessary as the firm had previously given advice about the transaction. He also said that he did not think he needed any further information as he had undertaken a "comprehensive review" (Exhibit 3, page 3). He agreed with the respondent's advocate that he assumed nothing had changed since June 2005.

24. When asked whether he was aware that he was required to hold a tax invoice for the transaction he indicated that he was aware although he said that was "impractical". He agreed that Toohey Reid had now changed their procedures to require a full copy of contracts since this case.

25. In re-examination he told the Tribunal that the firm of Toohey Reid had been subjected to a quality review audit by the Institute of Chartered Accountants in Australia and was found to be within the top quartile of chartered accounting firms.

SUBMISSIONS

26. Mr Toohey submitted that in considering what is reasonable in running a business, that one must take account that human error will occur. He said the Real Estate Agent involved mostly did residential contracts and had little experience in transactions of this nature. He also submitted that the remission system must be for cases where it is not black and white. He also argued that the transaction was not "extraordinary" as it was within the ordinary course of business which is undertaken by the applicant.

27. Mr Toohey also submitted that the ATO had made a quick decision in applying the penalty and that the ATO had erred in making that judgment as the transaction was not "extraordinary", and therefore did not fall within the Commissioner's guidelines.

28. Mr O'Seighin for the Commissioner, argued that the penalty system must be regarded quite strictly. He referred the Tribunal to Graham Docker and Associates Pty Ltd and Commissioner of Taxation 61 ATR 1077 at 1085, where Member Dr G Hughes said:

" Under a self-assessment regime, a rigorous adherence to rules was important and a failure to identify income must necessarily attract a strict penalty ."

He also provided very lengthy written submissions and a substantial volume of precedent material, all of which was very helpful for the Tribunal.

29. Finally, Mr Toohey made a submission that Mr Tuite had been emotionally distraught on the day he prepared the BAS due to a family issue. He argued that was a relevant factor. Mr O'Seighin argued to the contrary.

CONSIDERATION

30. The Tribunal has taken into account all of the relevant statutory and case law in determining this matter. The applicant made post-hearing submissions after the decision had been drafted. The Tribunal decided to consider those submissions and allowed the Respondent the opportunity also to respond to the applicant's submissions.

31. The questions which the Tribunal is required to determine, are dealt with below. Those determinations are also based on the following findings of fact:

a.

The applicant, Paul McNamara was a witness of truth. He was clearly a practical and intelligent businessman and did not seek to divert responsibility for the special condition in the contract to any other person.

b.

The special condition was not intended to be included in the contract by the purchaser but was signed without properly examining it or having a solicitor acting for him prior to signing it.

c.

The accountants were not aware of the special condition before the contract was entered into.

d.

The accountants provided advice on the contract in June 2005 and the contact was executed in July 2005. As the accountants do not seem to have been involved between the provisional advice and the signing of the contract, it was not unreasonable in the first instance, to assume that the contract entered into was consistent with their advice. This is reinforced by the longstanding relationship which Mr McNamara had as a client of Toohey Reid, and that he was a proactive and capable property developer.

e.

The accountants, on requesting the contract in November 2005, received only the first page of the contract. The accountants did not seek to attest to the efficacy of the contract by acquiring a faxed copy of the remainder of the contract.

f.

The transaction was significantly greater in value than any of the other 27 purchases of land with which the applicant company had been involved (Exhibit 5).

g.

The accountants did not have a tax invoice for the transaction as required by law when claiming the input tax credit.

h.

The BAS submitted in November 2005 for the period ending 30 September 2005 was in fact, false in a material particular.

•     Issue 1 - was the administrative penalty lawfully imposed ?

32. The relevant legislation is as follows: " Taxation Administration Act 1953

Sect 14ZZK - Grounds of objection and burden of proof

On an application for review of a reviewable objection decision :

(a)

the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates ; and

(b)

the applicant has the burden of proving that :

(i)

if the taxation decision concerned is an assessment (other than a franking assessment )-- the assessment is excessive ; or

(ii)

if the taxation decision concerned is a franking assessment -- the assessment is incorrect ; or

(iii)

in any other case -- the taxation decision concerned should not have been made or should have been made differently .

Section 284 - 25 of Schedule 1

284-25 Statements by agents

This Division applies to a statement made in an * approved form by your agent as if it had been made by you .

Section 284 - 75 of Schedule 1 284-75 Liability to penalty

(1)

You are liable to an administrative penalty if :

(a)

you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a * taxation law ; and

(b)

the statement is false or misleading in a material particular, whether because of things in it or omitted from it ; and

(c)

you have a * shortfall amount as a result of the statement .

Section 284 - 90 of Schedule 1

284-90 Base penalty amount

(1) The base penalty amount under this Subdivision is worked out using this table :

Base penalty amount

Item	In this situation:	The base penalty amount is:
3	Your * shortfall amount or part of it resulted from a failure by you or your agent to take reasonable care to comply with a * taxation law	25 % of your * shortfall amount or part

A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)

Sect 9-5 - Taxable supplies

You make a taxable supply if :

(a)

you make the supply for * consideration ; and

(b)

the supply is made in the course or furtherance of an * enterprise that you * carry on ; and

(c)

the supply is * connected with Australia ; and

(d)

you are * registered, or * required to be registered .

However, the supply is not a * taxable supply to the extent that it is * GST-free or * input taxed .

Sect 29-10 - Attributing the input tax credits for your creditable acquisitions

...

(3)

If you do not hold a * tax invoice for a * creditable acquisition when you give to the Commissioner a * GST return for the tax period to which the input tax credit ( or any part of the input tax credit ) on the acquisition would otherwise be attributable :

(a)

the input tax credit ( including any part of the input tax credit ) is not attributable to that tax period ; and

(b)

the input tax credit ( or part) is attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold that tax invoice .

However, this subsection does not apply in circumstances of a kind determined in writing by the Commissioner to be circumstances in which the requirement for a tax invoice does not apply .

Sect 75-20

Supplies under a margin scheme do not give rise to creditable acquisitions

(1) An acquisition of a freehold interest in land, a * stratum unit or a * long-term lease is not a * creditable acquisition if the supply of the interest, unit or lease was a * taxable supply under the * margin scheme ."

33. Item 3 of sub-section 284-90(1) of Schedule 1 to the Taxation Administration Act 1953 makes the penalty of 25% relevant where there has been "... a failure by you or your agent to take reasonable care to comply with a * taxation law ." Clearly, the central question to be answered is whether there has been reasonable care taken by the applicant, or by its agent, for whom it is vicariously liable. The respondent submitted that the Explanatory Memorandum to A New Tax System ( Tax Administration ) Act ( No 2 ) 2000 refers to careless acts or omissions pertaining to statements made to the Commissioner (paragraph 1.67). Also, the Explanatory Memorandum indicates reasonable care should be assessed by examining the circumstances of the taxpayer "including the taxpayer's knowledge, education, experience and skill" (paragraph 1.69).

•     Was there reasonable care taken by the applicant ?

34. The respondent submitted that the failure of the applicant to make itself aware of the existence of the margin scheme special condition means it is strictly liable (see Smith v Jones [1954] 2 All ER 823). The respondent submitted that the standard of care required by a property developer and a business entity would require it to ensure that the final contract is in identical terms to the previous draft contract. The respondent also referred the Tribunal to Taylor v Johnson (1983) 45 ALR 265 where it applied the English case of Solle v Butcher [1950] 1 KB 671 where at 691, Lord Denning said, inter alia, " neither party can rely on his own mistake to say it was a nullity from the beginning, no matter that it was a mistake which to his mind was fundamental, and no matter that the other party knew that he was under a mistake ." The same strict principle was used in Australia in relation to negligence ( Goldsbrough Mort and Co Ltd v Quinn (1910) 10 CLR 674 at 695 - 696 per Isaacs J).

35. The Tribunal accepts the very strict principle of law that the Parol Evidence Rule requires in land contracts, that parties will almost invariably be liable according to the written contract. But while that principle is indicative of the seriousness of the obligations of the purchaser, those authorities are not strictly on point. The applicant has not challenged the validity of the contract at the hearing, nor has he ever done so. He sought advice about the margin scheme in the course of negotiating the contract, but did not seek any further advice because he was not aware of the existence of the special condition until five (5) months after the contract had been entered into.

36. The respondent also submits that the applicant's failure to take reasonable care is manifested in his failure to provide full details to his Tax Agent. Where there is a unilateral mistake there is clearly a distinction to be drawn between a unilateral mistake as to offer and acceptance which was intended by the parties and a unilateral mistake which is adjunct (although fundamental) to the contract. While the strict principles of contract law are illuminating as to the applicant's liability for the consequences of the contract, this case is more strictly an issue of penalty under the Taxation Administration Act 1953 . Essentially, the evidence shows there was a mistake. It was a negligent mistake, but a mistake nevertheless. The applicant has always acknowledged that the efficacy of the contract was his responsibility. It is the resultant GST transaction prepared erroneously and the consequential effect of the penalty imposed in the circumstances of this case which is challenged. But having considered the relevant law and the pertinent facts as to whether the applicant's behaviour was reasonable, I must conclude that it was not reasonable in the sense that there was negligence on the applicant's part.

37. The Explanatory Memorandum to A New Tax System ( Tax Administration ) Act ( No 2 ) 2000 states, inter alia "[ a ] taxpayer would also risk penalty if the taxpayer was careless in presenting all of the relevant facts to the adviser and this had materially affected the advice on which the taxpayer sought to rely " (paragraph 1.76). The respondent also submits that a taxpayer may not exercise reasonable care if the provision of information or the answering of questions was not done honestly and for which there is not any real or acceptable explanation (see Taxation Ruling TR 94/4, paragraph 14(k); and Re Sparks and Federal Commissioner of Taxation [2000] AATA 28. The facts show that the failure to provide a full copy of the contract was not undertaken dishonestly but was provided by the applicant's authorised officer who was the Director's secretary of long standing. While the applicant must accept responsibility for this omission (which it clearly does through its Director), Mr McNamara does not appear to have been personally involved or necessarily have had any personal knowledge of the request by the Tax Agent. That inadequate provision of information was not followed up or pursued by the Tax Agent.

38. However, in all the circumstances, while there are some mitigating factors, there is clearly negligence on the part of the applicant from a legal point of view. There has also been a lack of reasonable care in a number of respects by the applicant.

•     Has the Tax Agent exercised reasonable care ?

39. The respondent argued that the standard of care required of a Tax Agent will be higher than that expected of the taxpayer. However, the taxpayer will be vicariously liable for any penalties resulting from the actions of the Tax Agent (see Explanatory Memorandum to A New Tax System ( Tax Administration ) Act ( No 2 ) 2000 - see paragraph 1.77) (also see Re Arnett and Federal Commissioner of Taxation 39 ATR 1095 ). The respondent also submits that the existence of the margin scheme special condition could have easily been ascertained had the complete contract been sought and examined by the Tax Agent. However, it was not until the ATO brought it to the attention of the Tax Agent in December 2005 that the special condition became known to the Tax Agent and ultimately to the applicant. The Tribunal agrees that that submission is damaging to the applicant's case.

40. The Tax Agent submits that reasonable care was demonstrated by the undertaking of a "comprehensive review" of the advice prepared in June 2005. Mr Tuite's evidence in this regard was less than convincing. Any review of the previous advice seems to have been merely re-acquainting the accountant with the previous advice given. That may have been 'comprehensive' but it does not indicate any review or subsequent advice provided. Indeed, reference to the previous advice does not indicate adding any objectivity to the analysis of the material being prepared by the accountant in the submission of the relevant BAS. Equally, it does not assist in ascertaining missing facts which were necessary to verify the existence of the transaction and any terms of the contract. It was not in any sense a 'comprehensive review'. In this regard, the contention of the Tax Agent is not supported by the evidence and the Tribunal does not regard that as being indicative of the Tax Agent's reasonable care.

41. The failure to hold a valid tax invoice is also indicative of a failure to take reasonable care by the Tax Agent (that is a further submission of the respondent). The applicant however, argues that holding a valid tax invoice is not practical in many instances. The Tribunal notes the Tax Agent's view that it may be impractical, however, that is the law. It is matter of strict liability and is provided for in s 29-10(3) of the GST Act. The Tribunal therefore rejects the Tax Agent's contention in respect of that matter.

42. The Tax Agent also contends that paragraph 51 of the ATO Practice Statement Law Administration - PS LA 2006/2 is relevant. That paragraph refers to the physical and mental health of a person. The Tax Agent's submission relates to the accountant, Anthony Tuite, who at the time was suffering from a family issue. The respondent submits that that is not any defence to the Commissioner's assertion that the Tax Agent has failed to exercise reasonable care.

43. The Tribunal is sympathetic to the circumstances of Mr Tuite at that time. An assessment of this contention must be made objectively in relation to all of the facts available. The Tribunal considers that the processing required for that transaction required a judgment in decision making, but for an accountant who is qualified and who has had eight years experience, the failure to follow up what might be regarded as an inadequate response to his request, does not stand out as a strong mitigating factor. In any event, the Tribunal heard that Mr Toohey and others in his firm are tax specialists. Therefore, the management responsibility and oversight required together with the availability of other tax advisers does not exonerate the Tax Agent from the lack of reasonable care on the basis of one employee experiencing personal difficulties.

44. The respondent argues that the applicant should not be entitled to avoid the provisions of the GST Act because of a "...lack of proper and diligent process..." ( Graham Docker and Associates Pty Ltd and Federal Commissioner of Taxation 61 ATR 1077 at 1078). The Tribunal has, in the main, accepted that submission.

45. The Tribunal has concluded that the Tax Agent has demonstrated a lack of reasonable care in a number of respects in relation to its legal obligation of demonstrating "reasonable care". As a consequence, the administrative penalty has been lawfully imposed.

•     Issue 2 - Was the penalty correctly assessed ?

46. The GST claimed was $95,455. This was determined by the Commissioner to be the shortfall amount. The penalty for exercising a lack of reasonable care in this circumstance is 25% of the shortfall amount. Twenty five percent (25%) of $95,455 is $23,863.75. This is the amount of the penalty imposed by the Commissioner. The Tribunal finds that the quantum of the penalty has been correctly calculated.

•     Issue 3 - Should the penalty be remitted in whole or in part ?

47. The power to remit penalty is contained in s 298-20(1) of Schedule 1 of the Taxation Administration Act 1953 . This empowers the Commissioner or his or her officers to remit all or part of a penalty.

48. The circumstances in which this provision might be applied has been amplified in PS LA 2006/2 at paragraph 139 of that Practice Statement. It provides that Tax officers may remit the penalty under subsection 284-75(1) where it is clear that:

•

" An isolated book-keeping or record keeping mistake was made ;

•

The mistake is not associated with an event or transaction which is extraordinary for the entity during the accounting period ;

•

The mistake was honest and unintended; and

•

The entity has a good compliance history ."

49. In relation to an isolated book-keeping or record keeping mistake , the applicant argues it is a mere isolated bookkeeping or record keeping mistake. The respondent argues there is a continuum of mistakes which do not go to record keeping.

50. In my view, the error concerned is not merely an error in faithfully recording an historic transaction. The work involved which caused the error is manifested in the creation of a document signifying some particular accounting treatment, and which has a legal effect. The record creation in this case is based on defective information provided by the taxpayer's office and without verification by the Tax Agent. It was also based on an assumption that the Tax Agent knew all of the facts, which in retrospect, it did not. I therefore find this element is not satisfied by the applicant's Tax Agent.

51. With respect to whether the purchase transaction was "an extraordinary transaction" , the applicant says it is a transaction which is conducted in the ordinary course of its business. The respondent submitted it is "extraordinary" and provided a sales listing from the Department of Natural Resources' official records which showed the applicant had undertaken 28 land purchases between 1998 and 2005 and the highest previous transaction had been to the value of $420,000 in November 2004. The others ranged from $33,775 to $410,000 (Exhibit 5). The Transaction in question amounted to $1,050,000. This is more than double any previous transaction and I accept that it is "extraordinary" within the present circumstances and within the usual meaning of that term.

52. In relation to whether the transaction was honest and unintended , I agree that it was and therefore, this element is satisfied.

53. The entity must also have a good compliance history . I accept this element is also satisfied based on the evidence provided and the fact that the applicant's Director, Mr McNamara, impressed the Tribunal as being an honest and diligent person.

54. It could be argued that all of these must be satisfied to have the penalty remitted. The respondent submits that remission must show it is an isolated, honest and unintended mistake and there must also be no absence of reasonable care. The respondent has also urged that "intention is not an element of the reasonable care test". (Page 25 of the respondent's submissions).

55. While that may be a logical and reasonable position to adopt, I think paragraph 140 of PS LA 2006/2 reveals that a "mens rea" concept or perhaps the degree of culpability of the taxpayer is to be taken into account in assessing whether remission of penalty is appropriate. Mr O'Seighin was instructed that these considerations had been taken into account in deciding not to remit the penalty. Paragraph 140 says paragraph 139 should be considered in conjunction with the following principles from the taxpayer's charter:

•

" Most entities want to comply with tax laws if they are helped to understand them and they are treated fairly ;

•

An entity should be treated as honest unless there is reason to conclude otherwise ;

•

Account should be taken of the entity's relevant individual circumstances and their attitude towards to complying with the tax laws ;

•

The more reluctant an entity is to comply with their obligations under the law, the more severe will be the penalty ;

•

An improvement in an entity's attitude to compliance should result in the Tax Office implementing a correspondingly less severe compliance strategy ."

56. It seems to me that a distillation of the factors in paragraphs 139 and 140 would suggest that a discretion to remit a part or all of a penalty could be exercised where it was demonstrated that the failure involved was an isolated, honest and unintended mistake (the fundamental factors), and in addition, where the following principal issues (the justification factors) can be answered in the applicant's favour:

a.

What explanation does the applicant have for the default?

b.

Was the applicant reasonably reliant on others or professional advisers, and to what degree?

c.

Did the failure or shortfall amount result from an event for which the applicant is not responsible, or did it occur by accident?

d.

Does the applicant seeking relief do so with "clean hands"? That is, its evidence of the transaction and its history of responsibility for its tax liabilities must be beyond reproach.

e.

There must be a harsh or unjust result in the circumstances if the strict legal obligations and strict interpretation of the statutory and policy guidelines were enforced.

57. Remission of part or all of a penalty is a discretionary aspect for the decision maker (the Tribunal in this case), after having weighed all of these fundamental and justification factors.

58. In relation to the fundamental factors described above, the applicant company's Director, Mr McNamara, impressed the Tribunal that he was both honest and diligent. The Tribunal was also satisfied that it was an isolated, honest and unintended mistake. The Tribunal accepts that the applicant sought relief with "clean hands". The evidence was that he had a good record in dealing with his tax liabilities and he did not seek to move responsibility elsewhere for the mistake. He demonstrated a good attitude towards compliance with the Tax Laws.

59. With respect to the justification factors described above, the applicant must bear primary responsibility for the error. He understood what the margin scheme was and clearly did not intend the special condition to be in the contract. It was not in the initial contract but it was present in the final contract. He was negligent but he indicated that he also relied on professional advisers. He relied on "trust" in his dealings with his Real Estate Agent who was a family friend. His usual practice was to initial amendments and special conditions but would defer to the preference of the relevant Real Estate Agent. Apart from some reliance on the Real Estate Agent at the final contract stage, he was serviced by a solicitor for settlement. It is not clear that he had a solicitor engaged prior to the signing of the contract but is clear he received no advice on the contract's special condition (or the consequential tax effect of it) by the solicitor. Of course, it was probably too late in a legal sense as he was then contractually bound. But had the solicitor examined the contract and proffered some advice, the applicant may have been able to renegotiate the contract before settlement if the vendor had been willing to acknowledge the mistake; or alternatively, the applicant could then have raised the matter with his accountants who would have been put on notice to prepare the BAS showing the true position.

60. The applicant's accountants prepared the BAS and claimed an input tax credit. Despite seeking a copy of the contract, that firm did not follow up the inadequate response from the applicant company's employee. The accountants did nothing deliberately to disadvantage the applicant but they were negligent in a legal sense. That aspect was an unfortunate timing issue. But, the accountants also processed the BAS without a tax invoice. Despite their view that it is impractical in many circumstances, that is the law. It is a strict legal requirement and the accountants should therefore bear some responsibility for the resultant situation of the applicant.

61. It was also an 'extraordinary' transaction and this should have necessitated a higher degree of diligence because of the risks involved. The applicant also bears primary responsibility for the negligence which brought about the situation in which he now finds himself. While the applicant is also vicariously liable for the penalty attributable to the work of the accountant (s 284-90 of Schedule1 of the Taxation Administration Act 1953 ), the applicant was entitled to the competent and professional services from the Real Estate Agent and the Tax Agent. There is insufficient evidence for the Tribunal to infer adversely about the applicant's Solicitor, although the grounds of appeal prepared by the applicant's accountants imply otherwise.

62. In these circumstances, the Tribunal concludes that not to grant some relief to the applicant would be unjust. While he made a mistake and he was negligent, his legal obligations had been undermined by the level of service of the Real Estate Agent and to some degree, his Tax Agent.

63. Relief in the form of remission of part of the penalty is therefore justified to reflect the contribution of professional advisers to the applicant's liability and on whose advice he was entitled to rely. This conclusion is also consistent with Re Kowadlo and Kowadlo and Commissioner of Taxation [2004] AATA 786 where Senior Member Pascoe said that the purpose was "... to penalise non-compliance with the requirements of the legislation . Loss of revenue is not the issue " (see paragraph 10). The main purpose of the transaction involved in this case was for the purpose of property development and to make a commercial return. The potential tax benefits were incidental to the transaction, although not insignificant from a financial point of view. They were not the sole or dominant purpose of the applicant's transaction and there was no deliberate avoidance of tax obligations. In making a determination of the applicant's grounds of review, the Tribunal should take account not only of objective factors, but also of the subjective evidence of the applicant ( Starr v Commissioner of Taxation [2007] FCA 23 per French J), who was accepted as an honest person, and who needed the advice and service of other parties who were professional persons.

64. Having analysed the evidence and the law and having drafted a determination, the Tribunal nevertheless allowed a late submission after receiving a request by the applicant. A further submission by the respondent was subsequently received. The Tribunal was not persuaded that the applicant's advocate provided any new dimension not previously submitted. The Respondent's submission was noted, particularly as to the impact of paragraph 140 of PS LA 2006/2. However, nothing in those submissions has altered the Tribunal's deliberations and decision as outlined herein.

65. The Tribunal determines:

a.

The Commissioner's decision to impose a penalty of 25% on the tax shortfall is affirmed;

b.

The amount of penalty assessed was correctly calculated;

c.

The decision not to remit penalty (at least partially) is set aside;

d.

Penalty should be fixed at $12,000;

e.

The matter is remitted to the Commissioner for implementation of this decision.

I certify that the 65 preceding paragraphs are a true copy of the reasons for the decision herein of Dr KS Levy, Senior Member

Signed: Fiona Kamst

Legal Research Officer

For the Applicant Mr S Toohey, Advocate
For the Respondent Mr K O'Seighin, Advocate