BARAKAT & ORS v FC of T

Members:
RNJ Purvis AM QC DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2007] AATA 1564

Decision date: 19 July 2007

RNJ Purvis, AM, QC (Deputy President)

The application

1. The present proceedings constitute an appeal by the above named Applicants against objection decisions made by the Commissioner of Taxation ("the Respondent") referable to penalties.

2. The Respondent contends that pursuant to section 284-75(1) of the Taxation Administration Act 1953 ("the TAA") the Applicant is liable to a penalty of $30,376.18 in respect of the period May 2004, and liable to a penalty of $104,295.09 in respect of the period June 2004. The Respondent maintains that the Applicant was reckless in the conduct of relevant affairs and as to the operation of inter alia, section 9-40 and Division 75 of A New Tax System (Goods and Services Tax) Act 1999 ("the GST Act").

3. More particularly, with reference to the May 2004 Business Activity Statement ("BAS") it is said that:

4. With reference to the June 2004 statement it is said that:

5. The penalty payable by the Applicant in respect of the May and June 2004 periods was assessed as $134,671.27. The Respondent contends that the base penalty rate of 50 per cent imposed for recklessness under section 284-90(1) of the TAA should not be reduced by reason of the application of section 284-225 of the TAA, and that there are no grounds, or insufficient grounds, for a remission of the penalties pursuant to section 298-20(1) of the TAA.

6. No issue is raised as to there having been a shortfall amount, or as to the imposition of the primary GST in respect of the two months. The appeal relates to the penalties imposed.

Relevant legislation

7. Schedule 1 of the Taxation Administration Act 1953 relevantly provides:

"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

    • ATC 2365

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

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:
    … …
    2 Your *shortfall amount or part of it resulted from recklessness by you or your agent as to the operation of a *taxation law 50% of your *shortfall amount or part
    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

  • …..

284-215 Exceptions

  • (1) If, apart from this section, you would have a *shortfall amount or a *scheme shortfall amount for an accounting period and:
    • (a) your shortfall amount or scheme shortfall amount, or part of it, was caused by you or your agent treating a *taxation law as applying in a particular way; and
    • (b) that way agrees with:
      • (i) advice given to you or your agent by or on behalf of the Commissioner; or
      • (ii) general administrative practice under that law; or
      • (iii) a statement in a publication approved in writing by the Commissioner;
  •   your shortfall amount or scheme shortfall amount is reduced to the extent that it was caused by that treatment.
  • (2) For the purposes of determining whether you are liable to an administrative penalty, you do not have a *shortfall amount as a result of a statement that is false or misleading in a material particular to the extent that you and your agent (if any) took reasonable care in making the statement.

284-225 Reduction of base penalty amount

  • (1) The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced by 20% if:
    • (a) the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; and
    • (b) after that time, you voluntarily tell the Commissioner, in the *approved form, about the shortfall or the part of it; and
    • (c) telling the Commissioner can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the audit.
  • (2) The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced under subsection (3) or (4) if you voluntarily tell the Commissioner, in the *approved form, about the shortfall amount or the part of it before the earlier of:
    • (a) the day the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; or
    • (b) if the Commissioner makes a public statement requesting entities to make a voluntary disclosure by a particular day about a *scheme or transaction that applies to your financial affairs-that day.

298-20 Remission of penalty

  • (1) The Commissioner may remit all or a part of the penalty.

The issues

8. As expounded by the Respondent, the issues for determination in this application are whether in the months of May and June 2004:

Relevant factual situation and findings of fact

9. The Applicant was a partnership carrying on a project management and construction business, acquiring land upon which it constructed townhouses. Land was initially acquired in 1994, with the adjacent land acquired in 2001. In 2000, the construction of townhouses upon the land commenced, and over the period August 2000 to June 2002 contracts for sale were entered into; from May 2004 to June 2004 such contracts were settled. In all, nine townhouses were built for a total consideration of $3,526,500.00.

10. The Applicant was registered for GST during the period 2 June 2000 to 1 July 2004, and during that period lodged BASs and accounted for GST on a monthly basis. It was Mr Michael Barakat who had responsibility for preparing the BASs on behalf of the partnership, and remitting any GST.

11. The partnership did retain a registered tax agent, a Mr Andreolas, who seemingly prepared the year end financial statements and income tax returns. However, Mr Andreolas did not prepare the Applicant's May or June 2004 BASs. These were prepared, signed and lodged by Mr Barakat. According to Mr Barakat, Mr Andreolas also, on a year end basis, ensured that the appropriate GST had been remitted to the Respondent in respect of the relevant year.

12. As has been earlier indicated in these reasons, in May 2004 the Applicant settled contracts for the sale of two of the nine townhouses, and in June 2004 settled contracts for the remainder. The Applicant had been accustomed to lodging BASs referable to cash transactions, and accounted for GST on a monthly basis. No mention was made in the May or June 2004 BAS of the sales of the townhouses.

13. As the construction activities were drawing to a close, and sales of the townhouses were all but complete, there was no need for the partnership to remain in existence. Accordingly, there was no longer a need for the lodging of a monthly BAS and registration for GST.

14. On a date in July 2004, Mr Barakat had a telephone conversation with an officer of the Respondent. A record maintained by the Respondent indicates that the conversation took place "on or about 14 July 2004". Mr Barakat was uncertain as to the date, but was of the recollection that it took place prior to his departure overseas on or about 17 July 2004. In that conversation, Mr Barakat requested that the Applicant's registration for GST be cancelled. The Respondent's officer recorded the date of effective cancellation as 1 July 2004, and the reason for cancellation as "enterprise ceased trading". Mr Barakat said that when he contacted the Respondent's help line, he intended to cancel "the BAS, GST" to take effect in the "new financial year". He "did not nominate a time or date for the cancellation". He says that he "queried" the "tax liability with regard to the sales of 24-26 Anzac Avenue as they were to be settled within a month" and was "told that any adjustment or tax liability could be assessed through annual reporting".

15. In its "Grounds of Objection to Assessment of Penalty", the Applicant stated:

"…(1) In about May or June 2004 when the settlement of the sales of the villas were being carried out, I telephoned the Australian Taxation Office to seek advice on what was required of the taxpayers as regards lodgement of further business activity statements and the payment of any remaining GST in light of the fact that the development was drawing to a conclusion and that the partnership which owned the development would then be dissolved.

(2) I was advised by the enquiry officer that the GST registration should be cancelled and that any remaining GST issues should be included in the partnership's final income tax return when a final assessment would then be made.

…"

16. The June 2004 BAS was lodged with the Respondent on 12 July 2004, and the May 2004 BAS was lodged on 3 June 2004. There is no notation of the date on which the telephone conversation took place. Mr Barakat maintains

ATC 2367

that it occurred prior to 14 July 2004; he having left Australia on 17 July 2004.

17. Mr Martin Henderson, a Project Leader with the Respondent, was a Team Leader in the Australian Taxation Office ("ATO") Small Business Call Centre in 2004. He was then responsible for overseeing the work performed by persons such as the individual with whom Mr Barakat had his conversation. According to Mr Henderson (Exhibit 1) "a circumstance where the client is planning to cease carrying on its enterprise, but has not yet done so" is not a circumstance where a GST registration may be cancelled. Thus if Mr Barakat had, in July 2004, indicated that sales had not yet been settled, the registration would not, Mr Henderson said, have been cancelled.

18. According to the records maintained by the Respondent, the cancellation was created on 14 July 2004, yet the BAS for June 2004 was lodged on 12 July 2004. There is no reason to doubt the accuracy of the Respondent's records. Even be it Mr Barakat now believes that he contacted the officer on an earlier date, it is more likely than not that the conversation occurred on 14 July 2004, and that the June 2004 BAS had been lodged prior to the conversation.

19. However, I am also satisfied that Mr Barakat was endeavouring to finalise a situation at a time of stress to himself, and before leaving the country. The settlements had already occurred, even be it he was not aware of the details. There was clearly room for misunderstanding on the part of Mr Barakat. I am also satisfied that he was endeavouring to finalise the BAS lodging obligations of the partnership prior to his departure, even be it he believed the GST indebtedness was a matter that would be assessed or calculated by the tax agent, and after valuation information was available. Having in mind that some of the property had been acquired pre 1 July 2000, and the "margin scheme" provisions in Division 75 of the GST Act were to be applied, it would not be unreasonable for Mr Barakat to rely upon professional advice to aid him in supplying relevant information to the Respondent. It is true, as submitted on behalf of the Respondent, that a notation could have been made on the BASs as to the outstanding matter, except that the form itself does not provide for the same.

20. I am satisfied that Mr Barakat did believe, as he stated in his letter of 6 September 2005 that, "all the relevant information and payment of GST and other tax liabilities would be included in the partnerships final income tax return as per the instruction given by the ATO help line. The final return was to be prepared by the accountant". I am not satisfied, however, that the officer in fact gave the above mentioned advice. But whatever was said by the officer was clearly misunderstood by Mr Barakat.

21. The Tribunal is satisfied that Mr Barakat was following an established practice lodging monthly BASs recording cash transactions. The building project was complete. No further monthly statements would be required. Mr Barakat was heading overseas and would not be completing another monthly statement. He believed that any outstanding liability arising from the sale of the townhouses was dependent upon valuations being obtained by professional advisers, and calculations then made. In fact it did take some time, extending into 2005 and 2006, before relevant information was obtained, calculations made and an amended BAS finally lodged for May and June 2004.

As to penalty

22. There is no issue in this matter that the Applicant's situation fell within the pre-requisites of section 284-75(1) of the TAA. A relevant statement, the BAS, was made. The two BASs were false in a material particular in that they did not disclose the sales, and stated information that was incorrect and incomplete. There was a shortfall in GST because of the statements. The exception provided for by section 284-215(2) is, however, applicable in the present circumstances.

As to reasonable care

23. The Tribunal is satisfied that the position taken by Mr Barakat in preparing the May and June 2004 BASs was reasonable in the circumstances in which he then found himself. Section 284-215(2) of the TAA may operate to disregard the shortfall amounts.

24. Mr Barakat did not act unreasonably in the circumstances in which he found himself. He did make contact with the Respondent, and did seek to obtain advice. He clearly misunderstood any advice given. He reasonably believed however, that the GST payable on the

ATC 2368

sales would be the subject of valuation and then calculation. He did not seek to mislead or avoid payment of any GST properly payable.

25. Mr Barakat sought to organise the affairs of the Applicant so that the monthly BAS would no longer need to be lodged. The tax agent and his legal adviser would assist in due course with the computation of the final GST liability. He was not in a position to deal with this himself. The relevant law was complex, as was the calculation of the liability. He was not frivolous, and his conduct was not irrational. There is not any evidence of errors or mistakes in the past. Mr Barakat was reasonably certain, in his own mind, as to the steps that would be taken in due course to finalise the taxation situation. In his mind, and reasonably so, the necessary information was not yet available, and the time had not arrived for the calculations to be made, and any amended statement provided to the Respondent.

26. It was not a case of Mr Barakat being unaware of the need to have the valuations obtained and calculations made. He was so aware, but reasonably believed that the supplies made by the Applicant did not necessarily need to be detailed in the monthly statements, but in a final accounting. Whilst the Applicant had been involved in the particular property development for a number of years, it was the one project which, by the end of the 2004 financial year, had come to fruition. There had not been any previous sales by which an appropriate procedure could be gauged. Mr Barakat was reliant upon professional advice. All he sought to do by lodging the May and June 2004 BASs, and then seeking de-registration, was to obviate the necessity for the Applicant to thereafter lodge monthly cash movement BASs.

27. The Tribunal finds that in all the circumstances of this matter, reasonable care was taken by the Applicant in relation to the relevant BAS. As Mr Barakat stated in his evidence:

"Question ('Q'): When you had conversation with the tax department person did you believe that GST would be payable on the sale of the townhouses?

  • Answer ('A'): Yes.

Q: Your situation was that you then knew GST would be payable?

  • A: That's right.

Q: But you are not in a position to calculate how much GST would be payable?

  • A: That's right, that's correct.

Q: Is that the position you say…?

  • A: That's exactly the position I was in. That's exactly what it was, the whole thing, the whole comes into that, to this, exactly that point…

(Page 26 of the Transcript of Proceedings)

Q: But you lodged two activity statements that didn't include sales that should have been included, didn't you?

  • A: I did not include them, as I said to you, I was not aware…I did not report them because I knew in the end there's going to be calculated through an accountant to figure out what is the value of the margin scheme for the development which is exactly what has been done…

(Page 28 of the Transcript of Proceedings)

Q: Mr Barakat, is there any question that has just been put to you by Ms Deards where you've felt you did not give a full answer or that you would like to say anything more in relation to the question

  • A: Yes, I've got to say. What I did I understood I was doing nothing wrong, I wasn't going out of my way on purpose to submit GST with a shortfall which is the way I understood it and I was not trying to cheat the Tax Department…."

(Page 33 of the Transcript of Proceedings)

28. I accept this evidence of Mr Barakat. The Applicant was waiting for its accountant to finalise the calculations necessary to apply the margin's scheme. Mr Barakat may have done little to inform himself as to the operation of the scheme, or what was necessary in order to apply it before he lodged the May and June 2004 BASs. He reasonably believed, however, that he could leave this to, and rely upon advice received, from the Applicant's accountant and solicitor. He believed that the margin scheme calculations, and the resulting liability to GST, could be dealt with separately and apart from the monthly activity statements.

ATC 2369

Recklessness

29. As submitted on behalf of the Respondent, recklessness is something more than mere inadvertance or carelessness. It involves running what a "reasonable person" would regard as an unjustifiable risk. As was stated in
BRK (Bris) Pty Limited v Federal Commissioner of Taxation (2001) ATC 4111 at 4129 :

… "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 a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement…"

30. The conduct of Mr Barakat falls short of that above described. He had no awareness of any real risk that the BASs may be incorrect. He believed that they were correct for what they purported to say. Nor was he indifferent as to whether or not the material in them was true and correct. He knew that the sales were not included, and intended to furnish the necessary information when it became available.

31. There may have been a serious and significant risk created that a tax shortfall would arise, but Mr Barakat was not aware of this possibility, and reasonably so. As was submitted on behalf of the Respondent, completion of the Applicant's BAS "clearly required professional advice in order to complete the May and June statements correctly". Mr Barakat realised this, but believed, reasonably, that the situation could and should be dealt with in the annual accounting. As he has consistently maintained, there was no intent on the part of the Applicant to avoid payment of GST properly due. It was merely that the calculation of it was something that he saw as separate and apart from the cash transactions that had until then been the subject of entries in the BAS. Mr Barakat intended to seek appropriate advice in order to complete the relevant BAS. He was not himself aware of the GST consequences of the sales made by the Applicant. He saw the transactions that he noted in the May and June 2004 BASs as separate and distinct from the sales transactions. This was an innocent mistake on his part, and not indicative of a disregard of, or indifference to, the consequences foreseeable by a reasonable person.

32. Mr Barakat, reasonably in all the circumstances, did not knowingly, nor would a reasonable person knowingly, run an unjustifiable risk of a tax shortfall in failing to take steps, at the time of lodging the BASs, to determine the GST treatment to be afforded to the sales. There was not gross carelessness on the part of the Applicant. Mr Barakat did take care. He was aware of the need for professional advice and assistance in order to determine the extent of the tax obligation.

Decrease in base penalty amount

33. Consistent with the findings of the Tribunal already noted, it is not necessary to consider whether, within the meaning of section 284-225 of the TAA, there should be a reduction of the base penalty amount.

34. However, submissions were made on behalf of the Respondent in relation to this consideration.

35. An audit of the Applicant's affairs was commenced in about June 2004. The Applicant had not at that time lodged the relevant BASs. Thus the Applicant was not in a position to make any relevant disclosure referable to the May and June 2004 BASs before the commencement of the audit. Once contact was made by an officer of the Respondent with Mr Barakat on 18 August 2004, the officer was referred to the tax agent and solicitor acting on the sales. Valuations were sought. It was not a matter of the Applicant making, or not making, disclosures. The sales were known. Valuations had to be obtained, and assessments raised. When so raised, according to Mr Barakat, the GST was paid. There is no basis upon which the Respondent might not have considered a decrease in the base penalty amount, if that consideration remains relevant.

Remission

36. Again it is probably unnecessary to deal with the question of remission, other than to say

ATC 2370

that in the absence of the findings already made, the penalties would have been remitted.

37. As was stated in
Re Michael Kowadlo and Sara Kowadlo and Commissioner of Taxation [2004] AATA 786 at paragraph 10, "the penalty regime is to penalise non-compliance with the requirements of the legislation". This implies, however, disregard or reckless behaviour, neither of which exists in the present circumstances.

38. Forthwith upon the Applicant being questioned as to non-compliance with the Act, Mr Barakat sought the advice of his tax agent and solicitor. This advice was sought, not in order to oppose the actions being taken on behalf of the Respondent, but to assist and ensure that the correct calculations were made. When put on notice as to the misunderstanding of its obligations, the Applicant did what was reasonably necessary to comply with them.

39. The Tribunal finds that in all the circumstances of this matter, there was a genuine and honest mistake as to the pre-requisites of compliance with the legislation.

40. There is not any issue raised in this application that the Applicant was not entitled to omit the shortfall amounts in the May and June 2004 BASs and include them in an annual GST return. But the Applicant, through Mr Barakat, believed that it was so entitled.

41. There is not any issue as to the Applicant not being entitled to complete an annual GST return because it remitted GST on a monthly basis, and did not use the GST instalment system. But the Applicant, through Mr Barakat, so believed.

Decision

42. For the reasons set forth above, the decisions under review are set aside.

 

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