• The impact of this case on ATO policy is discussed in Decision Impact Statement: Tavco Group Pty Ltd and Commissioner of Taxation (Published 4 December 2008).

TAVCO GROUP PTY LTD v FC of T

Members:
GD Walker DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2008] AATA 843

Decision date: 22 September 2008

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Professor GD Walker (Deputy President)

Basic facts

1. The applicant Tavco Group Pty Ltd (Tavco) on 14 December 2007 sought review under Part IVC of Taxation Administration Act 1953 (Cth) (TAA) of the respondent commissioner's decision of 31 October 2007 to disallow the taxpayer's objection dated 18 April 2007 (T17 pp48-50) against the assessment of penalty dated 27 March 2007 (T18 pp51-58).

2. The penalty was imposed following an audit by the commissioner in which he concluded that the taxpayer had a tax shortfall totalling $80,271 for the period ending 30 June 2005. The commissioner therefore issued an assessment of the taxpayer's goods and services tax (GST) net amount for the period ended 30 June 2005 and a penalty amounting to 50 percent of the shortfall amount on the basis of the taxpayer's recklessness as to the application of a taxation law.

3. The objection originally took exception to all adjustments and to the penalty imposed, but the taxpayer now disputes only the imposition of administrative penalties and the question of remission.

4. The respondent audited the taxpayer's business activity statements (BAS) for the period 1 July 2002 to 30 June 2006 (T15 pp28-30). In December 2005, the respondent contacted the taxpayer to arrange a verification visit because the payment of refunds on the applicant's account had been blocked. At that meeting, the taxpayer was informed that an audit would be conducted. On 2 June 2006, the respondent wrote to the taxpayer stating that the audit had commenced and wrote again on 9 June to confirm the date of the first audit meeting, which was set for 26 June 2006.

5. On 3 July 2006, the applicant amended its September 2005 BAS to include in its taxable supplies at label G1 the amount of a previously unreported sale (T10 p21). After some postponements, the auditor met with the applicant on 17 July 2006. At that meeting, the taxpayer did not point out to the auditor that an amended September 2005 BAS had been lodged, and did not so inform the respondent of the shortfall or the amendment until 18 December 2006 (the letter bearing that date is attachment 2 to Exhibit R3).

6. The previously omitted invoice was made out to Mrs Nahid Olfatpour in the amount of $802,711, together with $80,271.10 GST, making a total of $882,982.10 (T3 p13). It related to one of a number of the taxpayer's property developments.

7. In the course of the audit, the commissioner located a further invoice bearing the same date, 30 June 2005. It related to construction work on a different development. Unlike the omitted invoice, however, it was included as a taxable supply in the BAS for the period ended 30 June 2005. The applicant failed to report the GST liability shown on the omitted invoice until 3 July 2006, over a year later.

8. The respondent notified the applicant on 20 March 2007 that the sales figures and tax payable returned in the 30 June and 30 September 2005 BAS were revised to record an additional figure of $882,982 for sales and $80,271 for GST. An administrative penalty at the rate of 50 percent, amounting to $40,135.50 was imposed (T15 pp28-30).

9. Initially, the respondent increased the base penalty amount by $8,027.10, or 20 percent, pursuant to s 284-220(1) of Schedule 1 to the TAA (T15 p33). He did so on the basis that the amended BAS had reported the revision in relation to the September 2005 quarter when, in the respondent's view, it was properly attributable to the June 2005 quarter; further, during subsequent contacts the applicant remained silent about the revision until five months after having lodged the amended BAS, and still providing an inaccurate description of the revision.

10. The increase in the penalty was, however, simultaneously reduced by 20 percent on the ground that the revision of the September 2005 BAS was an attempt to rectify the situation of a tax shortfall, even though in the respondent's view it was not made in the correct reporting period. The reduction was treated as cancelling out the initial 20 percent increase although, strictly speaking, that was not mathematically precise. The applicant did not take issue on that point.

11. Shortly before the hearing, however, the commissioner revised his position by accepting that the taxpayer had disclosed the shortfall on 3 July 2006, after the audit had begun, and reduced the base penalty by 20 percent to $32,108.40 accordingly.

12. At the hearing, Mr Phillip Michael, accountant, appeared for the applicant, while Ms Vicki Hammond of the ATO's Legal Services Branch appeared for the respondent. The documents before the tribunal comprised the documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (the T documents), taken into evidence as Exhibit R1, together with the other documents tendered by the parties at the hearing. No oral evidence was given at the hearing.

Issues

13. The issues in the present application are:

• (a) Whether the applicant was liable to an administrative penalty within the meaning of s 284-75 of Schedule 1 to the TAA;
• (b) Whether the tax shortfall resulted from the applicant's recklessness; and
• (c) Whether the base penalty amount should be further remitted.

Applicant's arguments

14. The applicant called no oral evidence but relied on the T documents and the other exhibits.

15. On the applicant's behalf Mr Michael submitted, in the first place, that there was no tax shortfall as the invoice was sent to Mrs Olfatpour in the week following 30 June 2005 and was reported in the (amended) September 2005 BAS.

16. Although he could find no authority on when an invoice could be taken to be recorded, he argued that on the basis of the dictionary definition of "invoice", a document was not an invoice until it had been sent or recorded. The respondent's approach in taking the date appearing on the invoice as conclusive was incorrect. If no invoice was issued until the September 2005 quarter, there could be no issue of penalty because there would be no shortfall.

17. After outlining the chronology of the audit, Mr Michael noted that the December 2005 verification visit found that the applicant's affairs were in order but foreshadowed a BAS audit for a four-year period. The applicant asked its accountants to examine the records, and upon doing so, they found the omission referred to. The applicant thereupon lodged an amended BAS for the September 2005 period, paid the appropriate tax and the interest on it.

18. This was the first time in which an error had been found in the applicant's tax accounts. It had never happened before or since, in relation to 20,000 other invoices. Viewing the applicant's record as a whole did not disclose recklessness. The applicant runs a small operation and the invoice to Mrs Olfatpour was omitted because two procedures had not been followed. The procedures in place showed that the applicant was taking care to submit accurate returns and could not be described as acting recklessly.

Consideration

19. In these proceedings, the applicant has under s 14ZZK of the TAA the burden of proving that the assessment (including a penalty assessment) is excessive.

20. It became apparent at the hearing that in relation to the first issue, the applicant was proceeding under a misapprehension. It was not the respondent's case that the tax shortfall resulted from declaring the sale in the wrong quarter, but that initially the invoice to Mrs Olfatpour had not been reported at all. The applicant was reporting on an accrual basis and should have reported the sale as soon as the invoice was issued.

21. Neither party cited any authority on precisely when the liability under an invoice accrues. The respondent relied on s 29.5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act), which states that the GST payable on a taxable supply, before any of the consideration has been received, is attributable to the tax period "in which the invoice is issued" (s 29.5(1)(b)). An invoice is "issued", Ms Hammond submitted, on the date that it bears and the fact that it has never been sent is irrelevant. There was no evidence to show that the invoice was a mere draft.

22. In other contexts, however, the word "issue" involves some concept of sending or submitting. Latham CJ in
Koon Wing Lau v Calwell (1949) 80 CLR 533 at 568 put the matter in this way:

"…

The word 'issue' involves the idea of something passing from one person to another, sending forth, delivering. A document which is at all times retained by a person in his own sole control cannot be said to have been issued by him. He might execute or create the document and then decide not to give it to anybody. In such a case he would not have issued the document or even have purported to issue it.

…"

23. It could be argued that Latham CJ's remarks are distinguishable because the provision there in issue dealt with a document that was "issued to " another person, a more specific and teleological phrase that might be taken to import some idea of delivery, whereas the word "issue" on its own might not.

24. In
Attorney-General v Birbeck (1884) 12 QBD 605, however, the English Court of Appeal had to deal with a provision relating to the "issue" of notes by a bank, without any element of an issuance to a particular person. The court reached the same conclusion as Latham CJ. The word "issue" in that context "means the delivery of the notes to persons who are willing to receive them in exchange for value in gold, in bills, or otherwise …." (at 611).

25. In my view, the position is as stated by Latham CJ. An invoice is issued within the meaning of s 29-5(1)(b) when some act has been done to convey it to the intended recipient. Whether the invoice needs actually to have been received by him or her is not material for present purposes. In the absence of evidence to the contrary, the date appearing on an invoice could be taken to be the date on which that act was done. In this case, however, there is evidence that the act was not done until 3 July 2005.

26. The respondent rightly submitted that there was no evidence to show the invoice was a mere draft, but did not appear to dispute that it was not in fact sent to Mrs Olfatpour until 3 July 2005 and that until then it was being held in the applicant's offices for the purposes of checking and possible revision.

27. The applicant is liable for an administrative penalty under s 284-75 of Schedule 1 of the TAA because its BAS for the September 2005 quarter omitted to report the invoice raised in relation to Mrs Olfatpour. The statement constituted by the BAS was false or misleading in a material particular within the meaning of s 284-75(1)(b) because it omitted to include a taxable supply that the applicant was required to report. The BAS was erroneous or incorrect and therefore false or misleading (
Kajewski v Federal Commissioner of Taxation [2003] ATC 4375). The omission in the BAS created a tax shortfall of $80,271.

28. The administrative penalty was assessed at the rate of 50 percent on the basis of recklessness. In the present context, the term "recklessness" has been characterised as gross negligence or gross carelessness without regard for the consequences:
BRK (Brisbane) Pty Ltd v Federal Commissioner of Taxation [2001] ATC 4111; AAT Case 74/96. A finding of dishonesty is not required:
Hart v Commissioner of Taxation 2003 ATC 4665; (2003) 131 FCR 203 at 214; Taxation Ruling TR 94/4, paragraph 18.

29. Practice Statement PSLA 2006/2, paragraph 105, outlines the approach taken by the commissioner in determining whether a recklessness penalty should be imposed, consistently with the court's approach in BRK. In the present case, a reasonable person would have foreseen that reporting only one of the two invoices dated 30 June 2005 would probably result in a tax shortfall. Given the magnitude of the sum involved, such a shortfall could only be substantial.

30. The applicant submitted that it was not reckless when one viewed the omission in the context of its entire record; only one out of 20,000 invoices had been missed. But TR 94/4 and PSLA 2006/2 at paragraph 105 show that the focus of the analysis must be on the particular act or omission in question. That is consistent with normal legal principles.

31. The applicant's overall record becomes relevant only when the decision-maker is considering the question of remission, within paragraph 139 of PSLA 2006/2.

32. Further, the applicant has adduced no evidence to explain how the omission occurred, which makes it difficult to conclude that it was anything other than reckless.

33. In considering the question of remission, the commissioner sought to apply paragraph 139 of PSLA 2006/2. The tribunal should also be guided by that provision. In relation to the criteria set out in paragraph 139, the commissioner stated that the omission was not considered to be an isolated record-keeping mistake, acknowledged that it was not associated with an extraordinary transaction and that the applicant had "a fairly good compliance history", but did not consider the mistake to have been unintended.

34. The evidence shows, however, that the omission was an isolated error. While the applicant has adduced no evidence to show that it was honest and unintended, or generally how it occurred, paragraph 140 of PSLA 2006/2 requires decision-makers to treat an entity as "honest unless there is reason to conclude otherwise".

35. Consequently, the applicant is eligible for remission because it meets the criteria set out in paragraph 139 of PSLA 2006/2.

36. Shortly before the hearing, the commissioner revised his position and conceded, very properly in my view, that a reduction in the base penalty amount by 20 percent was appropriate on the basis that the applicant had disclosed the shortfall on 3 July 2006, after the audit had begun on 31 May 2006 (Exhibit R3, para 33).

37. In my view, however, a further reduction of 10 percent in the base penalty amount is warranted. While one could not say that "reasonable care" had been taken within the meaning of paragraph 139's introductory words, the evidence shows that the mistake was isolated and the presumption that the applicant acted honestly within the meaning of paragraph 140 applies as there is no reason to conclude otherwise. The decision under review should therefore be varied accordingly.

38. I have also concluded that the invoice in issue should have been reported in the BAS for the September 2005 quarter, not the June 2005 quarter. That conclusion could not alter the quantum of the penalty or remission, but it would affect the amount of any general interest charge imposed. As the interest charge is not in issue in these proceedings, no decision can be made in relation to it. I therefore simply note that any general interest charge should be calculated on the basis indicated.