Case S62

Judges:
HP Stevens Ch
TJ McCarthy M
PM Roach M

Court:
No. 1 Board of Review

Judgment date: 19 July 1985.

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H.P. Stevens (Chairman)

The question for decision in these three jointly heard references is whether additional tax imposed by sec. 226(2) should be remitted at a greater extent than the Commissioner has granted.

2. In May 1980 the three taxpayers (mother, father and son) commenced to operate in partnership a supermarket and ``deli''. The son managed the business and an old lady was employed to do some bookkeeping. An accountant A was engaged to prepare the necessary income tax returns for the year ended 30 June 1980 and he was supplied with the partnership's bank statements etc. A lodged, inter alia, a partnership return including a statement of trading and profit and loss account showing a net profit of $1,544.32 distributed equally between the three partners. There was also included a ``Balance Sheet'' which, inter alia, showed as a liability a bank account balance of $17,603.26. The partners' individual returns were apparently assessed on the basis of the returns prepared by A.

3. The son deposed that soon after the end of the first period he changed to another firm of accountants, B, because he was not happy (reason unclear) with the way A had done the returns. An employee of B said that the firm commenced work for the client in September 1980 and coded the cheque books etc. from 1 July 1980 to produce monthly trading accounts - only bank statements and butts provided - by computer. No copy of the 1980 accounts and balance sheet was available initially but when such were obtained it was found that the balance sheet bank balance of $17,603.26 was not the same as the employee had used (viz. $26,688.21). Upon examination it was found that the difference of $9,084.95 represented the total of five (5) cheques drawn prior to 30 June 1980 but not debited in the bank statement until after that date - in other words the $17,603.26 in the 1980 balance sheet was an unreconciled bank account figure which did not take into account the outstanding cheques of $9,084.95.

4. Upon discovering this the employee referred the matter to a partner who said it looked as if A had omitted those cheques and told her to put them into the 1981 accounts - done by increasing purchases etc. No attempt was made to check with A (not always co-operative) - the partner felt that was the answer and there was no point in contacting him. The adjustments made (after 30 June 1981) had the effect of reducing considerably the net income of the partnership for the 1981 year - by $9,084.95 to $11,567 - and the partnership and individual returns prepared by B were based on that reduced figure. Assessments to two partners (one non-taxable) issued on the taxable incomes returned. The necessary returns were also prepared by B for the 1982 year and assessments based thereon issued to all partners.

5. The affairs of the partnership were in due course subject to audit action by the Commissioner's officers and the net incomes returned by the partnership for 1981 and 1982 were adjusted by amounts of $12,047 and $2,829 respectively. As a result amended assessments (original 1981 assessment for previously non taxable partner) issued including additional tax in terms of sec. 226(2). At the hearing the references in relation to the 1982 year were withdrawn and it is only necessary to deal with the 1981 details. The 1981 total adjustment to the partnership net income of $12,047 comprised five (5) separate items viz. goods own use $2,080, rates and taxes - private (lived above supermarket) $501, car depreciation - private $36, car expenses - private $345 and outstanding cheques $9,085.

6. In adjusting the individual partner's assessments the share of the net income of each was increased by $4,016 with the additional tax liability in terms of sec. 226(2) being $2,570, $2,570 and $2,451 respectively. Of these sums the Commissioner remitted $1,782, $1,782 and $1,701 leaving amounts of $788, $788 and

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$750 respectively. Although the failure to disclose the proper share of net income from the partnership represented an omission of assessable income (not the claiming of deductions in excess of expenditure actually incurred) the Commissioner's officers segregated the individual components set out above and only ``penalized'' goods own use, rates and taxes and outstanding cheques. Not only did they do this but apparently the audit sheet sent to the taxpayers disclosed that the amounts `actually imposed' represented a percentage plus another percentage for interest. Whether this is a ``shorthand'' method of the Commissioner in order to determine the extent of remission of the statutory penalty as opposed to directly imposing his own penalty was not stated. However, it was put for the taxpayers that the amounts of $788, $788 and $750 included separate amounts of $614, $614 and $584 in respect of the outstanding cheques component and the claims before the Board were limited accordingly. No evidence was given as to the circumstances giving rise to the other components of the total omission.

7. The relevant objections lodged by another firm C engaged after the audit accept that the adjustments made by the audit were correct - B's employee acknowledged that the adjustment made for outstanding cheques was correct because A, despite the ``balance sheet'' had taken them into account in his trading and profit and loss figures and 1980 was the correct year to claim - and inter alia claimed -

``... that the assessments are excessive in that the additional tax shown therein applicable to the items set out hereunder is not authorised under the provisions of sec. 226(2) or any other section of the Income Tax Assessment Act 1936 as amended. None of these items represent assessable income or deductions in excess of expenditure actually incurred by the taxpayer in the respective year. Each item represents deductions that were incurred but which are not allowable deductions. The items to which sec. 226(2) does not apply as aforesaid are...''

(the items other than outstanding cheques)

``It is further claimed that the assessment in respect of the year ended 30th June, 1981 is excessive in that you have failed to remit the appropriate amount of additional tax pursuant to the provisions of sec. 226(3) in relation to the item described in the said letter as outstanding cheques. It is claimed that you have not taken into account the full circumstances of these deductions that amounted to $9,085 and that were incorrectly claimed in the return. It is claimed that the additional tax in respect of the said outstanding cheques should be reduced to an amount of 20% of the tax avoided plus an interest factor calculated from the date the tax would have become payable.''

8. Before turning to the arguments advanced it should be said that it was not seriously challenged that the taxpayers were unaware of the ``error'' made by B concerning the outstanding cheques and that evidence was led for the taxpayers from an ``expert'' witness. This witness, a chartered accountant specialising in management accounting and taxation, deposed, inter alia, that what B did was not unreasonable although he would not have submitted such a return without making an enquiry of A - other reasons than that assumed by B being possibilities.

9. The second of the taxpayers' two representatives presented the common address. He opened with the statement that although not a large amount was involved there was a matter of principle applicable to many and that it was a minor test case requiring comprehensive legal analysis. Reference was made to the Commissioner's Taxation Ruling IT 2012 and it was requested that the Board lay down comprehensive guidelines of its own. It also was the submission as I understood it that where an agent makes an error (by simple error or negligence) the appropriate ``penalty'' was merely the ``interest'' loss to the revenue.

10. I do not agree that the Board should lay down any comprehensive guidelines of its own. The Board deals with matters on a case by case basis having regard to the peculiar facts of each particular case and to attempt to predicate in advance what it will determine in particular hypothetical examples would be to abandon its function completely. Such function is, inter alia, to hear the evidence in each case and apply the relevant law to the facts as found in that case. No doubt from the arguments advanced some areas of the profession have been concerned about references to sec. 251M in past cases where taxpayers have claimed ``penalties'' should be waived because of

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alleged ``mistakes'' or negligence by agents but each case of this nature must also be decided on its own facts.

11. The first area of comprehensive legal analysis concerned the scope of the grounds of the objection - it being claimed that they were not limited to 20% plus an interest factor but would also cover a claim for remission below such a figure. Without intending any disrespect to the arguments advanced which referred to a large number of cases (Australian and overseas) and to dictionary definitions, I do not think it is really necessary to consider this issue unless I should determine that the degree of remission appropriate falls below the 20% plus an interest factor.

12. In so far as the degree of appropriate remission is concerned it was contended that there had been a not unreasonable accidental error by B and that, whilst it was conceded such error would have remained undetected except for the audit action, the appropriate figure for final imposition was merely the loss of interest to the revenue. Such loss calculated at 10% per annum would, it was submitted, be a sufficient punishment to the taxpayers. Reliance was placed upon any absence of fraudulent intent and upon the role of ``penalties'' as a deterrent and to compensate for a loss to the revenue.

13. It was said in relation to
F.C. of T. v. Trautwein (No. 3) (1936) 56 C.L.R. 211 that the oft quoted words therein of Evatt J. gave a misleading emphasis and that they should be read in the light of the different emphasis of the English case
A.-G. v. Till (1909) 5 T.C. 440 . It was also said that regard should be had to the fact ``penalties'' were not deductible so that in ``real terms'' they were greater than the percentage actually ``imposed''. Having regard to these points and to the fact neither the taxpayers nor B had attempted to deceive the Commissioner and it was unlikely to again occur, any deterrent aspect should be minimal. Rather it was only necessary to make the taxpayers account for profit or restore loss to revenue.

14. For the Commissioner it was submitted that no further remission was warranted because there had been a significant understatement which had not come to light until the audit and which otherwise would not have been discovered. Ignorance was not a justification and a low penalty would merely condone B's actions - acting on an assumption (not the only one open) without even attempting to contact A and without making any notation on the return lodged.

15. Both the taxpayers' and the Commissioner's representative made reference to sec. 251M and it is here that, in one sense, the minor test case aspect arises. It being said for the taxpayers that it was irrelevant and for the Commissioner that, inter alia, the section as a whole made it clear nothing B did could exonerate the taxpayers - sec. 226 was not reliant on sec. 251M and it was not the role of the Commissioner (I would add nor this Board) to check the rights of the taxpayer in terms of sec. 251M(1). The taxpayers' representative referred to two cases, Case R57,
84 ATC 430 and Case S20,
85 ATC 232 , which he regarded as containing unfortunate comments. In Case R57 Mr McCarthy at p. 436 referred to sec. 251M and, inter alia, said -

``It will be noted that sec. 251M(2) recognises that the negligence of a registered tax agent does not exonerate the taxpayer from his liability or from his obligation to make true and correct returns. Nevertheless, if the terms of sec. 251M(1) are satisfied - and that is a matter for a Court - the taxpayer can recover the additional tax from his agent. Thus the position is not as unfair as the taxpayer thought.''

(underlining inserted)

The underlined portion makes it clear that Mr McCarthy did not regard it as a matter for the Board to determine. In Case S20 at p. 235 I made some reference to sec. 251M concluding, after quoting the section, that ``the `harshness' is alleviated by the right of recovery from the party actually responsible. Overall then the innocent party is not disadvantaged whilst the object of sec. 226(2) is achieved''. Having quoted the section it was hardly necessary to reiterate the ``negligence'' aspect in the concluding remarks which related to a general issue of it being harsh ``if an innocent party is to be liable for the mistakes caused by others''.

16. Having regard to the comments made and the circumstances in which they were made I am unable to see that the profession has anything to be concerned about. The Board is not a judge of whether an agent is or is not negligent and cannot have regard to whether an

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action in terms of sec. 251M(1) would possibly succeed. All the comments do is to reiterate that a taxpayer cannot hide behind an agent - it is his responsibility to lodge a true and correct return - and to point out that sec. 251M(2) emphasises this although sec. 251M(1) can, if it is satisfied, have an amelioratory operation. I trust these comments will put to rest any misapprehension that parts of the profession may have.

17. As indicated above the taxpayers each understated their shares of the net partnership income for 1981 by $4,016 and, in terms of sec. 226(2), they omitted from their returns assessable income of this amount. Accordingly the statutory penalty imposed was 200% of the difference between the tax properly payable and the tax that would be payable upon the basis of the return furnished, i.e. the amounts set out in para. 6 above whilst the remissions already made have reduced the additional taxes imposed to approximately 61% of the difference between the taxes properly payable and those upon the basis of the returns. The understatements would not have been detected except by the Commissioner's audit whilst the original assessments of two partners which issued on 5 and 8 January 1982 were not corrected until notices of 2 December 1983 (previously non-taxable partner assessed on same date). Accordingly the revenue was ``out of pocket'' for some time - almost two years - whilst it had to act itself to ascertain the errors. In the circumstances I do not think that a simple interest figure of 10% per annum is appropriate. The partnership bank account was still in overdraft as at 30 June 1981 and was so for much of the 1982 year (bank interest $3,123.60 claimed in 1982 revenue statement) - if the taxpayers had been properly assessed in January 1982 the overdraft would have been larger and continued for a longer period (interest on increase to meet tax not deductible). Additionally, as mentioned in para. 16, the circumstances giving rise to the balance of the omission are unknown and these are relevant when considering a remission in terms of sec. 226(3).

18. As I have said each individual case must be determined on its own facts and, having regard to the matters referred to above, it is my view that the additional taxes imposed should not be further remitted.

19. For the above reasons I would uphold the Commissioner's decisions upon the taxpayer's objections for the years ended 30 June 1981 and 1982 and confirm the assessments for those years.