• The impact of this case on ATO policy is discussed in Decision Impact Statement: Manne and Commissioner of Taxation (Published 9 July 2010).

MANNE v FC of T

Members:
J Redfern SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2010] AATA 398

Decision date: 28 May 2010

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Senior Member J Redfern

Introduction

1. This is an application for review of an objection decision by the Respondent dated 16 May 2008 to disallow the Applicant's objection to amended notices of assessment for the years ended 30 June 2003, 2004 and 2005, administrative penalties imposed in respect of each of those years and the refusal of the Respondent to remit those penalties.

2. After the issue of the amended assessments but before the Applicant made her application to this Tribunal, the Respondent cancelled the amended assessment for the year ended 30 June 2005 and remitted all penalties for this year. The Respondent conceded that any amendment for the 2004/2005 assessment should have been issued by 4 August 2007 and as the amended assessment was issued after this date, it was invalid.

3. Thus, the amended assessments and penalties for the year ended 30 June 2005 are not in dispute and it is accepted the objection for that year should be allowed in full.

Legislative framework

4. The Commissioner may amend an assessment for a year of income under ss 170(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Amendment of an assessment may occur if the Commissioner conducts an audit and finds that the taxpayer has claimed deductions that are not properly deductible under ss 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) or such deductions claimed cannot be substantiated.

5. Division 284 of Schedule 1 to the Tax Administration Act 1953 (TAA) deal with liability for administrative penalties. Division 298 deal with the machinery provisions for the imposition and remission of penalties.

6. A taxpayer is liable for an administrative penalty under s 284-75 of the TAA if the taxpayer, or their agent, makes a false or misleading statement and the statement results in a "shortfall amount". Relevantly, there is a shortfall amount under s 284-80(1) if,

"a tax-related liability…. worked out on the basis of the statement is less than it would be if the statement is not false or misleading"

or, alternatively, if,

"an amount that the Commissioner must pay or credit…worked out on the basis of the statement is more than it would be if the statement were not false and misleading".

7. Under s 284-215(2) of the TAA, a taxpayer does not have a "shortfall amount" for the purposes of s 284-75 if the taxpayer has taken "reasonable care" in making the statement.

8. Subsection 284-90(1) provides for a base penalty of 25 per cent of any shortfall amount if the shortfall, or part of it, resulted from a failure by the taxpayer to take reasonable care. However, under s 284-225(3) where the taxpayer makes a voluntary disclosure to the Commissioner about a shortfall amount before the Commissioner notifies the taxpayer that an audit is to be conducted in relation to the period in question, the base penalty can be reduced by 80 per cent if the shortfall amount is $1,000 or more, or reduced to nil if the shortfall amount is less than $1,000.

9. The Commissioner may remit penalty under s 298-20(1) of the TAA. The Commissioner has issued guidelines as to when this discretion may be exercised in Tax Ruling TR 94/7 which provides,

"The discretion to remit penalty otherwise attracted under a shortfall section should be exercised in only those exceptional circumstances where, having regard to all of the circumstances, the application of a particular shortfall section and/or the rate of the penalty prescribed under that section would provide a clearly unreasonable or unjust result. However, the guidelines provided by this Ruling do not fetter authorised officers when exercising the discretion to remit. Each case should be decided on the basis of its own facts and circumstances."

The facts

10. The evidence was based on the documents filed pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 [T documents], additional documents filed by the Applicant to support her claims for 2002/2003 and 2003/2004 and evidence from the Applicant.

11. The Applicant lodged her income tax returns for the years 2002/2003, 2003/2004 and 2004/2005 on 1 October 2003, 6 August 2004 and 25 July 2005 respectively. She completed the returns herself and claimed work-related expenses, other expenses such as donations, costs in managing her tax affairs and interest deductions and expenses for an investment property owned by her. The total deductions claimed for each year in question, including interest for an investment loan to purchase the investment property, were as follows:

2002/2003	$17,336
2003/2004	$18,475
2004/2005	$31,251

12. Assessments were issued by the Respondent for tax refunds of $1,898.71 on 21 October 2003 in respect of 2002/2003, $2,067.43 on 19 August 2004 in respect of 2003/2004 and $7,396.15 on 4 August 2005 in respect of 2004/2005.

13. By letter dated 11 February 2007, the Applicant lodged amended returns for each of the years 2002/2003, 2003/2004 and 2004/2005, claiming additional deductions of $29,951 for 2002/2003, $30,349 for 2003/2004 and $19,630 for 2004/2005. The total deductions were substantial and, according to the Applicant's letter of 11 February 2007, would have reduced her taxable income to $2,677 for 2002/2003, $2,942 for 2003/2004 and $6,043 for 2004/2005.

14. On 30 May 2007, the Respondent issued a Notice of Income Tax Review to the Applicant requesting information in relation to the deductions claimed, including documents to support each claim. By letter dated 14 June 2007, the Applicant provided some information, including bank statements.

15. On 11 July 2007, the Applicant indicated to the Respondent that she no longer wanted to proceed with the amended claims and this was confirmed in writing by letter dated 7 August 2007.

16. The Respondent sent a Notice of Intention to Audit by letter dated 31 July 2007, with questionnaires attached, requesting information in relation to the deductions claimed by the Applicant, both in her original income tax returns and the amended returns for 2002/2003, 2003/2004 and 2004/2005.

17. The Respondent replied to the letter from the Applicant of 7 August 2007 by letter dated 9 August 2007, advising the audit would proceed on both the original returns and the amended claims for 2002/2003, 2003/2004 and 2004/2005. The Applicant told the Tribunal she did not respond to the questionnaire at that time as, notwithstanding the letter of 9 August 2007 from the Respondent, she believed the information was no longer required because she had withdrawn her amended claims.

18. The Respondent finalised the audit and disallowed the deductions claimed for each year in question, except for interest charges on the investment loan and some limited expenses incurred in respect of the investment property.

19. The Respondent issued amended assessments for 2002/2003, 2003/2004 and 2004/2005 on 8 November 2007. As a result of these assessments, there was a shortfall between the new assessments and the amounts as originally assessed by the Respondent for the relevant years ("the original claims shortfall"). There was also a shortfall between the new assessments and the amounts claimed by the Applicant in her amended claims ("the amended claims shortfall"). It is relevant to differentiate between these two shortfall amounts because the Respondent has treated them differently for the purposes of assessing and imposing penalties.

20. The Respondent formed the view that the Applicant had not exercised reasonable care in relation to the preparation of her original tax returns, and in relation to her amended claims. The Respondent imposed a base penalty of 25 per cent on the original claims shortfall, but reduced the penalty for the amended claims shortfall by 80 per cent on the basis that the withdrawal of the amended claims, which the Respondent accepted to the benefit of the Applicant, as a voluntary disclosure under s 284-225(3) of the TAA. The penalty notice was issued on 9 November 2007.

21. The Applicant objected to all amended notices by letter dated 28 November 2007, subsequently signed on 3 December 2007. The Respondent disallowed the objection notified by letter dated 20 February 2008. The Applicant objected again on 9 March 2008 and the Respondent disallowed the objection, further advising that the Applicant's objection to the amended assessment for 2004/2005 was invalid as it was made "outside the relevant timeframe". After getting notified of the decision by letter dated 16 May 2008, the Applicant responded by letter dated 20 May 2008 and provided further documentation to support some of her claims for deductions. The Respondent reviewed the amended assessments and decided to allow further deductions of $2,873 for 2002/2003, $2,370 for 2003/2004 and $2,677 for 2004/2005. The Applicant was advised of this by letter dated 30 June 2008. The Applicant objected to this review by letter dated 14 July 2008 but was advised by the Respondent that the objection was invalid as the amended assessment pursuant to this review had not yet issued. The Respondent issued new amended assessments for each of the relevant years on 30 July 2008, allowing the additional deductions notified in the letter of 30 June 2008.

22. There was no objection made to the decision to review the amended assessments and allow the additional deductions (as this review was in her favour) but the Applicant maintained her objection to the amended assessments and the imposition of penalties and apparently complained about the conduct of the Respondent on 2 December 2008. This letter of complaint was not included in the T documents but the Respondent's reply dated 23 March 2009 was included. It is relevant to the concession now made by the Respondent in respect of the amended assessment and penalties imposed for 2004/2005. The case officer who responded to the complaint formed the view that the amendment for 2004/2005 was outside the period allowed and should not have been made. He advised the Applicant of this and further advised the amended assessment for 2004/2005 and any resultant penalties would be cancelled.

23. On 20 April 2009, the Respondent cancelled the amended assessments for 2004/2005 and remitted all penalties.

The evidence

24. The Applicant gave evidence that she had kept records of the deductions claimed for each year, and produced documents supporting some of the claims not previously provided to the Respondent. After the Applicant gave an explanation for those expenses, the Respondent accepted additional deductions for a loan service fee for 2002/2003 and 2003/2004 and a bank switching fee for 2003/2004, but not the balance of deductions in dispute, comprised as follows:

2002/2003
Laundry expenses	$150.00
Interest and dividend deductions	$56.00
Gifts and donations	$150.00
Cost of fixing bathroom sink	$180.00
Cost of fixing leaking taps	$50.00
Repair of bathroom door	$60.00
Total	$646.00
2003/2004
Laundry expenses	$150.00
Self-education expenses	$180.00
Interest and dividend deductions	$153.00
Gifts and donations	$180.00
Other repairs, expenses, postage, telephone, travel and garage lock	$836.00
Total	$1,499.00

25. The Applicant told the Tribunal that she wore uniforms to work most days even though it was not compulsory. She worked as a customer service officer at Centrelink, often at the front desk, and Centrelink wanted service staff to wear uniforms where possible. The cost claimed was an estimate for laundering the uniforms each week.

26. The self-education expenses claimed were an estimate for the use of the computer and the Internet. The Applicant told the Tribunal she had attended a course paid for by Centrelink to improve her English, but she wanted to continue to improve these skills through using a computer and the Internet. The Applicant did not produce any documents to support this claim.

27. The Applicant claimed deductions for interest and dividend deductions on her bank account. She provided documents to substantiate the charges, but agreed that the bank account was private for use and did not relate to any investment loans.

28. The Applicant's claims for gifts and donations related to voluntary contributions for fees to her son's primary school and a donation to the Telugu Association in 2003/2004 of $100. She was unable to produce records evidencing payments to her son's school for 2002/2003 or 2003/2004 other than a copy of a statement of account for "Term 2, 2004" and receipt, which showed payment of $67 for a voluntary contribution of $25 for "class use" and fees for specific school activities such as excursions.

29. The Applicant gave evidence that there had been a leak in the bathroom of the rental property which she had fixed in 2002/2003. The Applicant produced a receipt for $60, which included the repair of the water damaged bathroom door, but told the Tribunal she did not have receipts for the other two items of $180 and $50, as she gave the cash to the tenant to pay for these repairs directly to the tradesmen. At the time of making the payments, she asked the tenant for a receipt evidencing the payments, but was advised the tradesmen did not provide any receipts so she made a note of the payments on a piece of paper and later recorded these payments in her tax return. The Applicant did not bring a copy of the note, but her evidence in relation to the circumstances of the payments, and the amounts claimed, was clear.

30. The Applicant was unable to provide details of the deductions in 2003/2004 of $836 for "other repairs", but said these expenses would include telephone calls to tradesmen, postage and travel to the rental property. She was unable to produce any receipts or provide particulars of the amounts claimed, but told the Tribunal she thought she had some documents at home about these claims. When questioned, the Applicant could not provide details or specify the nature of the documents that could be provided to support the claims.

31. The Applicant did not produce any documents or provide any information to the Tribunal to support her amended claims. She told the Tribunal that these claims had been made because she believed she had not claimed enough deductions in previous years but withdrew the claims after a conversation with an officer of the Respondent.

32. The Applicant was cross-examined about the amended claims and asked whether she had made these claims in 2007 because she was having financial difficulties. The Applicant agreed there had been financial difficulties after she and her husband separated by 2006, but denied the claims were false or misleading. She told the Tribunal that making the amended claims was "silly" and agreed she had not taken reasonable care when lodging the claims. The Applicant made the amended claims in the hope the Respondent would accept them and believed it was the role of the Respondent to assess these claims and advise her whether they were appropriate.

33. In addition to the deductions already claimed in the original returns for 2002/2003 and 2003/2004, the amended claims comprised large unspecified deductions such as $3,000 for "capital allowances", $5,000 for "travel, telephone, postage and stationary" and $3,800 for "sundry rental expenses". The Applicant could not explain these claims.

34. The Applicant told the Tribunal it was unfair for the Respondent to impose penalties in respect of her amended claims as she had withdrawn these claims after she had spoken to an officer of the Respondent and realised they would not be accepted. The officer she spoke to should have told her the Respondent would proceed to assess these claims and impose a penalty on any shortfall. The Applicant gave evidence she had carefully read the TaxPacks for the relevant years but conceded she not understand the tax laws and had decided to complete her own tax returns to save money. She did not know how much the Respondent was claiming but she was a single parent and could not afford to pay any penalties.

Issues in dispute and consideration

35. The Applicant contends the Respondent should allow all deductions as claimed in her original returns for 2002/2003 and 2003/2004 and should not have proceeded to assess or audit the amended claims for these years given her request that these claims be withdrawn. She also contends she took reasonable care in relation to preparation and lodgment of her original returns and her claims for deductions can be substantiated even though she does not have receipts for everything. The amended returns were submitted to the Respondent on the basis that she understood the Respondent would advise her whether the claims made were appropriate but as the claims were withdrawn in any event, no penalties should have been imposed. In the alternative, the penalties should be remitted.

36. The Respondent contends that only claims for deductions that can be substantiated or are properly claimable should be allowed, and that the Applicant did not take reasonable care in relation to the preparation of her original returns or her amended claims and the penalties were therefore properly imposed. The Respondent further contends that this case is not an exceptional one where the Respondent should exercise discretion to remit the penalties on the basis they "would provide a clearly unreasonable or unjust result" as contemplated by Tax Ruling TR 94/7.

37. The issues for determination are:

• (a) Whether the amended notices of assessment for 2002/2003 and 2003/2004 are excessive.
• (b) Whether the Applicant took reasonable care in the preparation of her original tax returns for 2002/2003 and 2003/2004.
• (c) Whether the Applicant took reasonable care in the preparation of the amended returns lodged for 2002/2003 and 2003/2004 by letter dated 11 February 2007.
• (d) Whether the administrative penalties imposed by the Respondent were properly imposed and, if so, whether they should be remitted.

38. I find that the amended notices of assessment for 2002/2003 and 2003/2004 were excessive, insofar as the Respondent failed to take into account a number of deductions which have either been subsequently accepted by the Respondent or substantiated by the Applicant.

39. The Respondent accepted the additional deductions referred to in paragraph 21 and issued amended notices on 30 July 2008. The Respondent has also now accepted the following deductions:

Additional deductions for 2002/2003
Management letting fee	$551.65
Postage	$33.00
Loan service fee	$96.00
	$680.65
Additional deductions for 2003/2004
Management letting fee	$661.10
Postage	$39.60
Loan service fee	$96.00
Rates (adjustment)	$13.31
Water rates (adjustment)	$21.25
Strata levies	$60.70
Loan switching fee	$300.00
	$1,191.96

40. I accept the Applicant has incurred laundry expenses of $150 for both 2002/2003 and 2003/2004 and that these expenses were work-related. I also accept that the Applicant paid for repairs to the bathroom of her rental property in the sum of $290. Even though she does not have receipts for two of these payments, she has given detailed evidence about the repairs required, the amounts paid and the circumstances of the payments, and has given an explanation for why she does not have receipts.

41. I do not accept the deductions claimed for 2002/2003 and 2003/2004 for interest and dividend deductions or for gifts and donations. The interest and dividend deductions do not relate to the Applicant's investment property and are expenses of a personal or domestic nature. Such expenses are not deductible under ss 8-1(2) of the ITAA 1997.

42. The Applicant has not provided any documentation to support her claim for voluntary school contributions to her son's school other than the statement of account and receipt referred to in paragraph 28. However, if this account is similar to the contributions the Applicant says she paid in 2002/2003 and 2003/2004, these voluntary contributions would not be deductible in any event. Division 30 of the ITAA 1997 sets out the requirements for taxpayers in making a claim in respect of a gift or donation. The recipient must be a fund, authority or institution as described within the Division. In the case of school contributions, only contributions to a public fund established and maintained solely for providing money for the acquisition, construction or maintenance of a building is deductible. There is no evidence that any contributions paid were for a building fund. The claim for a donation to the Telugu Association is similarly not deductible as the Association is not a recipient nominated in Division 30.

43. The Applicant did not provide any details of how she estimated the expenses for or used her home computer and internet for self education, and I am not satisfied these expenses can be claimed as work-related expenses.

44. The Applicant could not provide any evidence to support her claim for "other repairs" for 2003/2004. While it is possible the Applicant have incurred the costs claimed, and in particular the costs of mobile telephone calls to tradesmen, the agent and the tenants, she bears the onus under s 14ZZK of the TAA to establish these claims. In the absence of any documents or evidence from the Applicant to support this claim, I am unable to accept this deduction.

45. The Applicant gave no evidence and did not produce any documents to support the deductions claimed in her amended returns for 2002/2003 and 2003/2004. I am satisfied the Respondent was correct in disallowing these claims.

46. In summary, I find that the deductions referred to in paragraphs 39 and 40 should be allowed.

47. The Applicant's objection to the amended assessment for 2004/2005 and the imposition of penalties should be allowed. The Respondent has made the concession and has cancelled the amended assessments. I am satisfied that the amendments should not have been made and that they are invalid.

48. The further issue that arises is whether an administrative penalty should be imposed on any shortfall amount for 2002/2003 and 2003/2004.

49. In the case of the original tax return for 2002/2003, the Applicant has substantiated all deductions, save for the claim for interest and dividend deductions and the claim for gifts and donations. Any shortfall amount resulting from these disallowed deductions is in the vicinity of $206. The Applicant kept records of most claims and where there was no record, she nonetheless had an explanation sufficient to satisfy the Tribunal about the validity of the deduction claimed. She did not understand that the requirements imposed by the legislation regarding deduction of the interest charges and donations. A careful reading of the TaxPack for the relevant years may have alerted the Applicant to this, and the Applicant conceded she did not have a good understanding of the deductions she could claim. While her imperfect understanding of the relevant tax law provisions is no excuse, taking into account the fact that all but a small part of her deduction claims turned out to have been substantiated and were subsequently allowed, it cannot be said that she did not exercise "reasonable care" in claiming those deductions in her original tax returns for 2002/2003.

50. The position is similar in relation to the original tax return for 2003/2004, except that there are additional deductions claimed which have not been allowed for certain rental and self education expenses. These claims could not be established. While I am of the view that some of the rental expenses of $836 may have been incurred for 2003/2004, there was insufficient evidence to substantiate or quantify these claims for the purposes of the proceedings before the Tribunal. The Applicant kept written records of most deductions claimed for 2003/2004 and I accept her evidence that she was diligent in recording and making claims, even though her understanding of what was properly deductible was imperfect. As with the previous year, the deductions claimed but disallowed are a small proportion of the total deductions claimed for 2003/2004.

51. According to the Revised Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (No 2) 2000, which introduced the reasonable care test,

"The reasonable care test is not intended to be overly onerous for taxpayers. For most taxpayers, an earnest effort to follow the TaxPack instructions would usually be sufficient to pass the test" [paragraph 1.70]

52. It is also relevant to note the comments of Hill and Hely JJ in
Hart v Federal Commissioner of Taxation (2003) 131 FCR 203 at 214,

"the mere fact that a tax return includes a deduction which is not allowable is not of itself sufficient to expose the taxpayer to a penalty. Negligence, at least must be established.."

53. For instance, in the case of the rental deductions for 2003/2004 referred to in paragraph 44, I am satisfied the Applicant had some basis to make the claim for rental expenses when she lodged her tax return on 6 August 2004 even though she was not able to substantiate them at the time of the audit or the hearing. While her record keeping for these claims has fallen short, the Applicant could substantiate and/or particularise all other claims. Taking all of these matters into account, I find that the Applicant used reasonable care in the preparation of the returns for 2002/2003 and 2003/2004, and no penalty should be imposed in respect of any shortfall based on the original returns lodged by the Applicant.

54. However, I accept the Respondent's contention that the Applicant did not use reasonable care in relation to the amended returns lodged by letter dated 11 February 2007. The deductions claimed could not be substantiated as having been paid, and included claims that were not work-related or were not properly quantified or documented. The Applicant conceded she had not taken reasonable care in making these claims and the fact the Applicant did not appear to understand that the tax system is based on self assessment and self amendment by taxpayers, is no excuse. Once a taxpayer makes a statement that is false and misleading and that statement gives rise to a "shortfall amount", the taxpayer will be liable to an administrative penalty. In this case, the "shortfall amount" falls within item 2 in s 284-80(1) of the TAA being,

"An amount that the Commissioner must pay or credit…worked out on the basis of the statement is more than it would be if the statement were not false and misleading."

55. It is not necessary that the credit or refund be paid; but merely that a shortfall amount based on the statement would result:
Re Dixon and the Commissioner of Taxation [2006] AATA 130. The Applicant made the statements in relation to her amended returns for 2002/2003, 2003/2004 and 2004/2005 and lodged the amended returns with the Respondent by letter dated 11 February 2007. Thereafter the Respondent commenced an assessment of those returns and requested further information from the Applicant. The Applicant says she withdrew the claims after she realised they would not be accepted but the Respondent had already expended resources on investigating the claims and proceeded with an audit. The Respondent calculated the amended claims shortfall on the basis of the statements contained in the amended returns but gave the Applicant the benefit of s 284-225(3) of the TAA. In my view, these penalties were properly imposed.

56. The question therefore arises as to whether these penalties should be remitted. The fact that the false statement was detected by the Respondent before allowing or paying any credit to the Applicant is not a matter that should be taken into account in the exercise of the discretion to remit:
Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287.

57. The particular circumstances of the case should be considered to assess whether the outcome would be harsh. In the present case, the penalties imposed for the amended returns were reduced substantially by the Applicant's voluntary disclosures and are in the vicinity of $800 as at 9 November 2007. While the Applicant says she will find any penalty difficult to pay as a single parent, there is no evidence of any particular hardship she will suffer. It should also be taken into account that any additional liabilities for tax, penalties and interest in respect of her original returns for 2002/2003, 2003/2004 and 2004/2005 will either be reduced or eliminated entirely by reason of the Respondent's concessions and by this decision, which would have the effect of relieving some of the financial pressure on the Applicant. I am not satisfied that the imposition of penalties in respect of the amended returns would produce a harsh outcome in the circumstances.

Conclusion

58. The Respondent's decision not to allow the Applicant's objection to the amended assessment and imposition of penalties for 2004/2005 should be set aside and the Applicant's objection is allowed.

59. The Respondent's decision not to allow the Applicant's objections in respect of the amended assessments for 2002/2003 and 2003/2004 is varied to the extent necessary to give effect to the deductions referred to in the above paragraphs 39 and 40 of these Reasons.

60. The Respondent's decision not to allow the Applicant's objections in respect of the penalties imposed on any shortfall resulting from the original returns for 2002/2003 and 2003/2004 is set aside and the Applicant's objection is allowed.

61. The Respondent's decision not to allow the Applicant's objections in respect of the penalties imposed on any shortfall resulting from the amended returns for 2002/2003 and 2003/2004 or to remit those penalties is affirmed.