• The impact of this case on ATO policy is discussed in Decision Impact Statement: Shin and Commissioner of Taxation (Published 25 March 2011).

SHIN v FC of T

Members:
F OLoughlin SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2010] AATA 1012

Decision date: 13 December 2010

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Mr Frank O'Loughlin, Senior Member

Introduction

1. The present matters concern two applicants, a husband and wife, who are retired and who in 1999 invested in a retirement village scheme as a member of a syndicate or partnership. They claimed deductions for amounts actually outlaid on entering the scheme and for amounts contracted to be paid in years after entering the scheme upon a range of contractual requirements being satisfied.

2. The investments of $100,000 by each applicant were made in the 1999 year of income and led to deductions of $400,000 being claimed in the 1999 year by each applicant which produced carried forward loss deductions in the 2000 and 2001 years.

3. The Commissioner has denied the deductions beyond the amounts actually paid, contending that the amounts contracted to be paid were not incurred.

4. Amended assessments were issued to give effect to the denial of the deductions claimed.

5. Penalties have been levied for failure to take reasonable care in the 1999, 2000 and 2001 years in respect of the tax shortfalls that arose. The penalties have been set at 5% on the basis of voluntary disclosures that were made. The penalties were levied pursuant to s 226G of the Income Tax Assessment Act 1936 (Cth) (the Assessment Act) for the 1999 and 2000 years and ss 284-85 and 284-90(1) item 3 of the Taxation Administration Act 1953 (Cth) (the Administration Act) for the 2001 year.

Issues in dispute

6. The issues in dispute are:

• (a) first, in filing the relevant tax returns that claimed deductions, whether the applicants took reasonable care within the meaning of s 226G of the Assessment Act for the 1999 and 2000 years and ss 284-85 and 284-90 (item 3) of Schedule 1 to the Administration Act for the 2001 year. For penalty purposes, the Commissioner does not contend that the applicants did not adopt reasonably arguable positions. Accordingly, if there is insufficient evidence of what advices were obtained in preparing tax returns, the issue can be distilled to whether the applicant can be said to have taken reasonable care if the applicant has adopted a reasonably arguable position; and
• (b) second, if there is a potential for penalty to be imposed, whether any penalty should be remitted pursuant to s 227(3) of the Assessment Act for the 1999 and 2000 years and s 298-20 of Schedule 1 to the Administration Act for the 2001 year

7. The substantive tax liability is not contested following the decision of the Full Federal Court in
Commissioner of Taxation v Malouf (2009) 174 FCR 581. Nor is it disputed that there were tax shortfalls.

Facts

8. The facts to be found are as follows:

• (a) each of the applicants invested $100,000 in the retirement village scheme promoted by Prime Life Corporation Limited, or one of its subsidiaries, which entailed a proposed development of a retirement village in Springvale in Victoria, to be known as the Windsor Gardens retirement village. The manner in which the applicants invested was through participation in a partnership (the Windsor Gardens Partnership) made up of a number of syndicates or partnerships, one of which included the applicants as members;
• (b) the facts concerning the retirement village scheme and its features are materially no different from those extant in the case of
  Malouf v Commissioner of Taxation (2008) 250 ALR 253 and (2009) 174 FCR 581. The applicant invested in a retirement village development scheme promoted by Prime Life limited which entailed a deposit and commitments to pay further amounts upon a range of conditions being satisfied which, in 1999, 2000 and 2001 were not satisfied;
• (c) the applicants are a married couple of Korean origin who speak limited English and who are retired;
• (d) Mr Shin had the dealings with the advisors to both of the applicants and Mrs Shin relied on her husband;
• (e) Mr Shin displayed minimal understanding of the retirement village investment and of the current proceedings. In 1999 he was looking to make an investment that would provide for his retirement and consulted his tax agent. Mr Shin was advised that the retirement village investment was a sound investment and that tax deductions would be available as claimed. He inspected the proposed village and thought it would be a place for him to live in his retirement;
• (f) there was evidence that the applicants' solicitor had also invested in the retirement village scheme;
• (g) Mr Shin trusted his professional advisers and signed documents that they prepared for him to sign. Those documents included his tax returns and the voluntary disclosure that he made;
• (h) the extent of independent analysis of any entitlements to deductions by the applicants' advisers is unknown. There is no evidence of what enquiries, if any, were made by the applicants' tax agent; and
• (i) at the time of preparation of the applicants' tax returns there were no authorities specifically dealing with deductions for participation in retirement village arrangements of the kind the applicants entered. The first such decision was that of Allsop J in
  Malouf v Commissioner of Taxation (2008) 250 ALR 253 in relation to a retirement village arrangement in all material respects identical to that the applicants entered. His honour's finding in Malouf must mean that any taxpayer who entered a similar arrangement and who claimed deductions on the basis that Mr Malouf claimed his deductions must have had an argument in relation to their position that was as likely as not to be correct in the sense of that phrase as observed by Hill J in
  Walstern v Commissioner of Taxation [2003] FCA 1428 and Cooper J in
  Prebble v Commissioner of Taxation 2002 ATC 5045.

The penalty system

9. The system of penalties is a feature of a self assessment system that is not intended to punish taxpayers when they have made an honest and genuine attempt to correctly determine their taxable income.^[1] Second Reading Speech to the Taxation Laws Amendment (Self Assessment) Bill 1992: Minister assisting the Treasurer, Mr Baldwin. The Explanatory Memoranda to the Bills that were the pathway to the penalty provisions becoming part of the statutory scheme presently relevant include the statement that on questions of interpretation, reasonable care requires a taxpayer to come to conclusions that would be reasonable for an ordinary person to come to. The underlying substantive issue here involved interpretation of the meaning of the word incurred.

10. There are many authorities that can be referred to that show that mistakes can be made in coming to conclusions concerning taxation laws and particular facts. The litigation involving the late Neil Forsyth's home office expenses that concluded in
Federal Commissioner of Taxation v Forsyth (1981) 148 CLR 203 is a case in point where six judges agreed with Mr Forsyth, and only three disagreed and he lost his case. Mistakes can be made in very reasonable circumstances.

11. While the Commissioner has not imposed penalty for failure to take a reasonably arguable position, he contends, in effect, that the two bases on which penalty can be imposed are alternatives.

12. Penalties for failure to take reasonable care are a part of a wider scheme of penalties for taxation shortcomings. It is in the context of the whole of that scheme that penalties imposed pursuant to s 226G of the Assessment Act and ss 284-85 and 284-90(1) item 3 of the Administration Act for failing to take reasonable care need to be considered.

13. Of particular relevance in the present circumstances are the penalties which can be imposed for failing to take what might be described as reasonably arguable positions - s 226K of the Assessment Act and ss 284-75(2) and 284-90(1) item 4 of the Administration Act and the role that those penalty provisions play in considering what constitutes taking reasonable care.

14. The Commissioner's contention does not appear to be consistent with the policy underlying the penalty for failing to take reasonably arguable positions. That policy was noted by Hill J in
Walstern v Commissioner of Taxation [2003] FCA 1428 at [106] in the following terms:

"Section 222C was introduced in 1992 as part of a number of amendments designed to improve the system of self-assessment. Among those amendments was s 226G which imposed by way of penalty additional tax equal to 25% of the tax which should have been paid where the taxpayer failed to take reasonable care to comply with the Act. It is clear from the Second Reading Speech to the Taxation Laws Amendment (Self Assessment) Bill 1992, which introduced the amendments that while all taxpayers would be penalised if they failed to exercise reasonable care it was thought appropriate (apparently the initiative came from a study of experiences in the United States of America where a similar system operates) for taxpayers who made large claims, generally in excess of $10,000 to exercise greater care and thus to pay a greater penalty - a further 25%. The Minister assisting the Treasurer, Mr Baldwin said, inter alia:

'The whole idea of the new understatement penalties is to ensure that people do not get penalised when they have made an honest and genuine attempt to correctly determine their taxable income.

…

The government considers it appropriate that a more rigorous standard apply where the item at issue is very large. … Where the interpretation of the law for such large items is in issue, we expect taxpayers to exercise more care; that is, the taxpayer must have a reasonably arguable position on the matter.

The crux of the standard is that taxpayers should not take positions at law which, at the time taken, are not about as arguable as an alternative position. All said and done, the standard is about analysing the law and its application to the facts. If there is a strong argument to support the taxpayer's position, that may be enough. However, the Government does not want taxpayers to take positions which are not defensible or which do not have reasonable prospects of success.' "

15. His honour then quoted from the Explanatory memorandum to the bill through which the penalty regime became the law. At [108(6)] his honour continued:

"An argument could not be as likely as not correct if there is a failure on the part of the taxpayer to take reasonable care. Hence the argument must clearly be one where, in making it, the taxpayer has exercised reasonable care. However, mere reasonable case [sic] will not be enough for the argument of the taxpayer must be such as, objectively, to be 'about as likely as not correct' when regard is to be had to the material constituting 'the authorities'."

16. In
R & D Holdings Pty Ltd v Deputy Commissioner of Taxation [2006] FCA 981 at [182] Finn J expressed agreement with Hill J's remarks to the effect that:

"… an argument could not be as likely as not correct if there was a failure on the part of the taxpayer to exercise reasonable care in making it, although reasonable care alone would not result in an argument being, objectively, "about as likely as not correct".

17. It is with some hesitance that any remarks of Justice Hill are to be discounted, however it is necessary to reconcile them with the terms of the Minister's explanation to which he referred. The Minister did not suggest that failing to adopt a reasonably arguable position attracts an additional penalty. The Minister's explanation was that the reasonably arguable position was simply a higher standard that needs to be met where large amounts are involved; the position adopted must be reasonably arguable, failing which the same level of penalty of 25% of the shortfall tax applies as would apply in cases of smaller shortfalls accompanied by a failure to take reasonable care.

18. It is possible to reconcile the comments made by Justices Hill and Finn with the Minister's explanation if they are to be taken as saying that satisfying the reasonably arguable position test means that reasonable care has been taken.

19. It follows, therefore, with some reservations given the remarks of Justices Hill and Finn, that:

• (a) first, the reasonably arguable position test is a higher standard to meet than the reasonable care standard; and
• (b) if a taxpayer has adopted such a reasonably arguable position the reasonable care standard should be accepted as having been met.

20. That outcome is consistent with the remarks in the Explanatory Memoranda referred to above that if a taxpayer comes to a conclusion that is reasonable then there should not be any penalty. Coming to the same conclusion as a judge of the Federal Court, albeit one reversed on appeal, cannot be said to be an unreasonable conclusion.

21. If this approach be wrong there are three matters that need to be dealt with:

• (a) first, the present circumstances show that the applicant has acted on advice from those who it might be expected would be in a position to know what the proper tax treatment of the outgoings and commitments to the retirement village scheme would be, a tax agent. If the test were limited to the taxpayer (which is not the case) then there is evidence of care being taken which in the circumstances of the present applicants is sufficient for the standard to be met;
• (b) second, there is no evidence of the care that was taken by the applicants' tax agent. As taxpayers are vicariously responsible for their agents failures to take reasonable care, in the present matter the applicants could not be said to have discharged their burden and, subject to the question of remission, would fail; and
• (c) third, the question of remission arises. For there to be a remission it is necessary to show that the penalty is harsh in the particular circumstances of the taxpayer - see
  Dixon as Trustee for Dixon Holdsworth Superannuation Fund v Commissioner of Taxation (2008) 167 FCR 287 at [26] per Spender, Ryan and Emmett JJ. There need to be mitigating circumstances that could be regarded as mitigating the taxpayer's behavior while at the same time recognising the purpose and role that penalties play in a system of self assessment of tax liability - see
  Re Hobart Central Child Care Pty Ltd and Commissioner of Taxation [2005] AATA 1027 at [205] per Deputy President Forgie. In circumstances where a taxpayer adopts a position in a tax return that conforms to the outcome reached by a considered decision of a judge of the Federal Court in materially the same circumstances any level of penalty would be harsh. This is particularly so in the context of a system that includes general and shortfall interest changes that, among other things, compensate the Commonwealth for the loss of the time value of money. It is appropriate to remit any penalty that would otherwise be applicable.

22. The decision of the Tribunal is that the objection decisions are to be set aside and in lieu thereof the objections are allowed.