• The impact of this case on ATO policy is discussed in Decision Impact Statement: Nitram Consulting Pty Ltd and Commissioner of Taxation (Published 20 February 2009).

NITRAM CONSULTING PTY LTD v FC of T

Members:
GD Walker DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2008] AATA 1119

Decision date: 16 December 2008

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Professor GD Walker (Deputy President)

1. The applicant seeks review of the rejection by the respondent of its objection to the assessment of a penalty at the rate of 25 percent of the tax shortfall amount for failure to take reasonable care in lodging a revised business activity statement (BAS) for the quarter ended 30 September 2005.

2. At all relevant times the applicant carried on business in the hospitality industry and was registered for goods and services tax (GST) from 22 September 2003, accounting for GST on a cash basis, quarterly.

3. On 25 August 2005, the applicant sold its interest in a hotel-tavern situated in Balgownie Road, Balgownie, New South Wales. As described in the contract for sale (the contract), the interest sold included the land, improvements, fixtures and other inclusions. The consideration received by the applicant for the sale was $957,000, including $87,000 representing GST (T p20).

4. Relevant boxes marked on the contract specified that the sale was a taxable supply and was not a supply of a going concern (T p19). The applicant issued a tax invoice to the purchaser for the sale (T p26), showing the amount of $87,000 for GST.

5. The applicant lodged a BAS for the relevant quarter on 28 October 2005 reporting GST on the sale as $87,000 (T p28).

6. On 16 March 2007, the applicant's present tax agent amended the applicant's BAS for the relevant quarter, reducing the GST payable on the sale of the interest in the hotel to nil, thereby creating a refund payable to the applicant (T p31).

7. The respondent thereupon reviewed the applicant's tax affairs, commencing in March 2007. As a result of that review, the respondent determined that the sale of the interest in the hotel was a taxable supply and was subject to GST (T p36). The respondent then amended the applicant's BAS, increasing GST on the sale of the interest in the hotel to $87,000, issuing an assessment of a GST net amount on 1 May 2007 (T p44). No refund of the GST amount originally paid had been made by that time.

8. The respondent considered that the applicant or its tax agent had failed to take reasonable care in lodging the revised BAS and imposed a penalty of 25 percent, issuing an assessment for $21,750 accordingly (T pp36, 45).

9. The applicant objected to that assessment of penalty but the respondent disallowed the objection, issuing a notice of decision on objection on 10 August 2007 (T pp46, 49). The applicant appealed to this tribunal for review of the objection decision on 13 September 2007 (T p1).

10. At the hearing, Mr Rod Thompson of BPI Accounting Services appeared for the applicant while Ms Emily Webster of ATO Legal Services appeared on behalf of 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 adduced.

Issue

11. At the hearing Mr Thompson, principal of BPI Accounting Services, the applicant's current tax agent, did not dispute the amount of the administrative penalty assessed but argued the issue of whether the penalty imposed should be remitted in full or in part in accordance with s 298-20 of schedule 1 of the Taxation Administration Act 1953 (Cth) (the TAA).

Submissions

12. Mr Thompson admitted at the outset that he had made mistake because of his then inexperience as a tax agent. There had been a long history of misleading information supplied by the applicant's previous tax agent and solicitors. It had been necessary for his firm to amend the previous five years of income tax returns.

13. As regards GST on the sale of the hotel interest, he now realised that he should have sought a private ruling. He had instead advised his client that if he lodged an amended BAS, they would receive a call from the Australian Taxation Office (ATO) seeking clarification and the matter would be resolved in that way.

14. The amended BAS was duly lodged and, as expected, the ATO contacted the applicant to enquire about it. Following those discussions, the ATO determined that there would be no refund of GST, and Mr Thompson thought that would be the end of it. He did not believe that a penalty such as the one imposed would be incurred.

15. Although he had made a mistake, the records available to him were in disorder and he had no intent to deceive. He had at the time telephoned the ATO information line and had obtained some information, but now realised he should have followed up the matter.

16. His own tax record was blameless and the error was the result of inexperience on his part. He operated a small suburban practice and as his client could not afford the $21,750 penalty, the client would sue him to seek recovery under his professional indemnity insurance.

17. The transaction was an extraordinary one and the circumstances were hazy because he had been unable to obtain replies to his correspondence with the previous tax agent and solicitors.

Applicable law

18. In proceedings such as these, s 14ZZK of the TAA places on the applicant the burden of proving that the decision under review should not have been made or should have been made differently.

19. Section 284-75(1) of Schedule 1 (TAA) states that a taxpayer is liable to an administrative penalty if he or she, directly or through an agent, makes a statement to the commissioner that is false or misleading in a material particular and that a shortfall results. The relevant shortfall amount "is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been" (s 284-80 of Schedule 1).

20. The amount of the penalty is calculated as a percentage of the shortfall amount. Pursuant to s 284-90 of Schedule 1 (TAA), the percentage is determined by the nature of the taxpayer's conduct when the false or misleading statement was made. In this instance, the respondent applied Item 3, which operates where "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".

21. Pursuant to section 298-20 of Schedule 1 (TAA) the Commissioner may decide to remit all or part of the penalty.

Consideration

22. It is not disputed that the applicant or its agent made a false or misleading statement under s 284-75(1) of the schedule 1 to the TAA in relation to the applicant's BAS for the relevant quarter. The applicant thus has a tax shortfall in the relevant quarter as a result of that false or misleading statement, even though no refund was actually paid.

23. The applicant failed to take reasonable care by failing to ensure that its current tax agent had all the documents necessary for ascertaining the correct GST treatment of the transaction, such as the tax invoice that the applicant issued to the purchaser, even though those documents were in its possession. Further, a higher standard of care is required in relation to transactions that are extraordinary for an entity, as this one was, and where the possible shortfall from incorrect treatment is great.

24. A taxpayer's liability to a shortfall penalty arises automatically if the taxpayer makes a false or misleading statement that results in a shortfall amount (s 284-80 of schedule 1 to the TAA). The base penalty amount of a penalty is calculated in accordance with s 284-90 to the TAA, item 3 of which sets the penalty for failure to take reasonable care at 25 percent of the shortfall amount.

25. The respondent relied on s 14ZZK of the TAA to put the applicant to proof of those factors necessary to make out its case that any remission of the penalty under s 298-20 of schedule 1 to the TAA is warranted.

26. It is settled law that a taxpayer using a tax agent to lodge its BAS, or any other document, is liable for the actions of his or her tax agent: see, for example,
Kajewski v Federal Commissioner of Taxation (2003) ATC 4375.

27. The respondent submitted that there are no grounds to warrant exercising the discretion under s 298-20 of schedule 1 to the TAA to remit all or a part of the 25 percent penalty. He relied on the relevant ATO policy on the remission of penalties contained in Law Administration Practice Statement 2006/2: Administration of Shortfall Penalty for False or Misleading Statement (PSLA 2006/2). PSLA 2006/2 notes that intention is not an element of the reasonable care test, but that a penalty may be remitted where it is clear that:

• • An isolated bookkeeping or record keeping mistake was made;
• • The mistake is not associated with an event or transaction that is extraordinary for the entity during the accounting period;
• • The mistake was honest and unintended; and
• • The entity has a good compliance history.

28. In this case the false or misleading statement did not result from an isolated bookkeeping error but from the applicant's failure to provide all relevant documents to its tax agent and the applicant's failure to seek a private ruling or otherwise review the relevant law and ensure that a false or misleading statement was not made. It was not disputed that the applicant does not have a particularly good compliance history.

29. The respondent relied on
Dixon as Trustee for The Dixon Holdsworth Superannuation Fund v Federal Commissioner of Taxation (2006) ATC 2092, which resembles the present case in a number of material respects. The applicant Dixon had purchased a property as a going concern and, on the advice of his then tax agent, did not claim an input tax credit (ITC). Some time later, Dixon engaged a new tax agent who, on the basis of incomplete evidence and failed attempts at obtaining clarification, lodged an amended BAS claiming an ITC on the purchase of the property.

30. Dixon claimed to have been unaware of the amended BAS, but the tribunal accepted that the new tax agent had told him that the money could be returned if the claim for the ITC was found to be mistaken and that Dixon was prepared to proceed with lodgement on a speculative basis.

31. The tribunal upheld the 50 percent shortfall amount for recklessness but remitted it by 25 percent on the basis that special circumstances existed, as the applicant had not received the refund claimed.

32. The Full Court of the Federal Court (
Archibald Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Federal Commissioner of Taxation 2008 ATC ¶20-015), however, held that special circumstances were not required before the discretion to remit can be exercised, but that on the other hand the mere fact that no harm had been done was not of itself a matter that could be taken into account (2008 ATC 20-015, at para 21).

33. In this case it is not disputed, and I am satisfied, that the applicant at all relevant times had in its possession the documents, notably the tax invoice. If it had passed them on to Mr Thompson at the relevant time, they would have made it plain to him that the property the subject of the contract was not eligible for consideration as a going concern. The tax agent did, however, have in his possession a copy of the contract, which declared that the sale was a taxable supply and that it was not the supply of a going concern. The fact that the purchase price shown in the contract excluded GST was not inconsistent with the sale being a taxable supply. Further, an agreement in writing between the parties before the supply is made is required for a supplier to be that of a going concern (s 38-325(1)(c) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act). That is a threshold requirement.

34. One point of distinction between this case and Dixon, however, is that in the latter case the tax agent had denied advising the taxpayer to proceed with a speculative lodgement, but that was the only plausible explanation for the course of events. Here, Mr Thompson freely admitted that he gave advice to that effect.

35. Nor is this a case where the tax agent hoped that the ATO might fail to notice the change. On the contrary, Mr Thompson assumed that they would and his approach, incorrect and imprudent though it was, was to rely on receiving a call requesting further information. I think that distinction warrants a small reduction in the penalty imposed.

36. The decision under review is varied by substituting an administrative penalty of 20 percent for the 25 percent of the tax shortfall imposed by the decision under review.