SE Frost M

Administrative Appeals Tribunal, Sydney


Decision date: 20 March 2009

SE Frost (Member)

1. On 23 February 2009, at the conclusion of the hearing in this matter, I delivered an oral decision, affirming the decisions under review. The respondent Commissioner has asked for a statement in writing of the reasons for my decision. Those reasons follow.

2. The dispute between the parties results from incorrect income tax returns lodged by Mr Necovski for the 2005 and 2006 income years. In those returns there were significant deductions claimed in respect of gifts and rental property expenses, and lesser amounts claimed by way of tax offsets. Mr Necovski accepts that the claims were incorrect. He has now paid the right amount of tax. However, he is dissatisfied with the amount of administrative penalty that has been imposed on the "shortfall amounts" that resulted from the inclusion of the incorrect claims in his returns. The level of penalty imposed was calculated at the rate of 25% for failure by the taxpayer or his agent to take reasonable care to comply with a taxation law. The questions for my determination are whether the rate of penalty imposed is correct, and, if it is, whether it should be remitted in part or in full.


ATC 2883

Mr Necovski and his wife gave oral evidence, which I accept as entirely truthful. They said that the returns were prepared and lodged by Mr Necovski's tax agent. They said that the agent included claims that neither of them had asked the agent to include in the returns. Mr Necovski said that he was unaware that the claims had been included in his returns. Both Mr Necovski and his wife felt that the errors in the tax returns were the fault of the tax agent. Mr Necovski acknowledged, however, that he had signed the returns before they were lodged with the Commissioner's office. Like many taxpayers who have their returns prepared by registered tax agents, Mr Necovski trusted his agent and assumed that the information that the agent included in the returns was correct, and that all deduction claims were justified. Unfortunately that trust was misplaced.

The administrative penalty provisions

4. The Parliament has established a "self assessment" income tax system under which an assessment may issue based solely on information contained in the income tax return of the taxpayer.

5. This self assessment system depends on the accuracy of the information contained in a taxpayer's tax return. This is because, as a general rule, the Commissioner will accept a taxpayer's return at face value. As part of the self assessment system, taxpayers are exposed to penalties when their returns contain statements that turn out to be incorrect.

6. A taxpayer is liable to an administrative penalty if the taxpayer or the taxpayer's agent makes a statement to the Commissioner which is false or misleading in a material particular and the taxpayer has a "shortfall amount" as a result of the statement: s 284-75(1) in Schedule 1 to the Taxation Administration Act 1953 ("TAA").

7. If the shortfall amount resulted from a failure on the part of the taxpayer or the taxpayer's agent to take reasonable care to comply with a taxation law, the base penalty amount automatically imposed on the taxpayer is 25% of the shortfall: item 3 in the table in s 284-90(1) in Schedule 1 to the TAA.

8. The provision could hardly be expressed more clearly. If either the taxpayer or the agent fails to take reasonable care, then the 25% penalty is automatic. That position is not altered if, for example, the agent took reasonable care while the taxpayer did not. Nor is it altered if the taxpayer took reasonable care while the agent did not. If either one of them has fallen short of the reasonable care requirement, then the taxpayer becomes liable to the penalty.

9. In written submissions relying on Miscellaneous Taxation Ruling MT 2008/1 and the Revised Explanatory Memorandum for the A New Tax System (Tax Administration) Bill (No. 2) 2000, the Commissioner stated:

  • "[33] A taxpayer is required to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer to fulfil the taxpayer's tax obligations.
  • [34] That test looks to whether a person, in all the circumstances of the taxpayer, would have foreseen as a reasonable probability or likelihood the prospect that the act or failure to act would result in a shortfall amount. It is not a question of whether the taxpayer actually foresaw the probable impact of the act or failure to act, but whether a person in the same circumstances of the taxpayer would have foreseen it. The test does not depend on the actual intentions of the taxpayer.
  • [35] Reasonable care requires a taxpayer to make a reasonable attempt to comply with the provisions of a taxation law. The effort required is one commensurate with all the taxpayer's circumstances, including the taxpayer's knowledge, education, experience and skill.
  • [36] The standard expected of a tax agent will be much higher than the standard expected of the client. This is due to the knowledge, education, skill and experience of the practitioner obtained from continual exposure to the operation of the financial system and similar transactions for numerous clients. When examining an entity's affairs a tax agent would be expected to apply this experience to the entity's situation and to ask the questions necessary to correctly prepare the client's return. However, this does not mean that a tax agent will always be expected to display the highest level of skill or foresight of which anyone is capable. The standard is that of a prudent professional of normal intelligence in the circumstances of the tax agent."

    ATC 2884

10. I agree with the Commissioner's outline.

11. This is a case where the registered tax agent included in the client's returns amounts by way of deduction or tax offset which had no reasonable basis to support them.

12. The major part of the deductions claimed related to mortgage interest paid on Mr Necovski's principal place of residence. It was treated as if it were interest paid on the Necovskis' investment property, although they gave evidence that the loan on that property had been paid off in around 1990. No prudent tax agent could reasonably include such a claim in a client's return.

13. As for Mr Necovski himself, although I accept that he placed his trust in the agent, he should not have allowed the returns to be lodged as they were. He did not review them, before lodgement, with the level of care that could be expected of a reasonable person. By treating the signing of his returns as a mechanical exercise, he denied himself the opportunity to query the claims and to satisfy himself that the claims were in order, or to have them removed from the return.

14. In the circumstances, the penalty amount of 25% of the shortfall was properly imposed.

15. I have considered the question of remission of the penalty under s 298-20(1) in Schedule 1 to the TAA. Although perhaps in differing degrees, both the taxpayer and the agent failed to take reasonable care. In those circumstances the imposition of the penalty could not be regarded as harsh or unintended. Instead, it seems to me, this is precisely the sort of case where a penalty would be expected to be imposed, and not disturbed.

16. For these reasons the decisions under review are affirmed.


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