CASE 74/96

Members:
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 20 December 1996

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KL Beddoe (Senior Member)

The applicant seeks review of three objection decisions by the respondent Commissioner in relation to assessed additional tax. The objection decisions relate to the years of income ended 30 June 1991, 30 June 1992, and 30 June 1993.

2. In relation to the years of income ended 30 June 1991 and 30 June 1992, the relevant provision is s 223 of the Income Tax Assessment Act 1936 (``the Act''). Subsection (1) of that section provides that:

``223(1) Where-

• (a) a taxpayer-
  • (i) makes a statement to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, that is false or misleading in a material particular; or
  • (ii) omits from a statement made to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, any matter or thing without which the statement is misleading in a material particular; and
• (b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading, as the case may be,

the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess.''

5. A reference in s 223 to a statement made to a taxation officer is a reference to a statement made to a taxation officer orally, in writing, in a data processing device or in any other form. Without limiting the generality of the foregoing, such a statement includes a statement:

• ``(a) made in an application, certification, declaration, notification or other document made, prepared, given or furnished pursuant to the Act;
• (b) made in answer to a question asked of a person;
• (c) made in any information furnished pursuant to the Act; or
• (d)...''

[s 223(8)]

6. In relation to the year of income ended 30 June 1993 the relevant provisions are s226G, s 226H and s 226J. Those sections are set out in full as follows:

``226G Subject to this Part, if:

• (a) a taxpayer has a tax shortfall for a year; and
• (b) the shortfall or part of it was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part.

226H Subject to this Part, if:

• (a) a taxpayer has a tax shortfall for a year; and
• (b) the shortfall or part of it was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part.

226J Subject to this Part, if:

• (a) a taxpayer has a tax shortfall for a year; and
• (b) the shortfall or part of it was caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the amount of the shortfall or part.''

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5. Section 227 of the Act requires the Commissioner to make an assessment of the additional tax payable by a person under Part VII of the Act, which includes each of the statutory provisions set out above. Subsection (3) of s 227 provides that the Commissioner may, at the Commissioner's discretion, remit the whole or any part of the additional tax payable by a person under Part VII of the Act.

6. In relation to the year of income ended 30 June 1993 the applicant has also been assessed for interest under s 170AA of the Act. The amount assessed is an amount of $4.69 and no issue arises before the Tribunal in relation to this amount. This Tribunal, on my understanding of the law, does not have any jurisdiction to review that amount and nothing was submitted to me to suggest the contrary.

7. At the hearing Mr J Bickford appeared for the applicant, and Ms C Holmes appeared for the respondent. The documents filed pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 in relation to each application were placed before the Tribunal as Exhibits 1, 2, and 3 respectively. Further documents were put into evidence and marked as exhibits. Oral evidence was given by the applicant and also by a chartered accountant, who did not seek anonymity, but I think, in the circumstances, should be allowed anonymity. Evidence was also given by Trevor William Mills, a detective with the Fraud Squad of the Queensland Police Force.

8. Most of the applicant's evidence is contained in his statement of evidence, which is Exhibit 6 in these proceedings. It is convenient to set out the statement of evidence in full, as cross-examination of the applicant did not reveal any substantial matters which had been left out of the statement of evidence:

``1. In or about the month of June, 1991, I was speaking to a friend of mine that I had known for approximately 15 years, Colin Carey (`Carey'). I was commenting that every year I was paying PAYE tax and an additional tax of approximately SIX HUNDRED DOLLARS ($600.00).

2. Carey said that he was investing in Australian films and that the Government was encouraging this investment and was providing tax relief as a result of the investment. Carey said that it was a fairly safe investment and that it had been working well for him.

3. Carey briefly explained how the procedure operated and, as I still did not fully understand its operation, Carey gave me a phone number for a person who I could speak in more detail about it, Daniel Devine (`Devine').

4. Shortly afterwards, I telephoned Devine and he provided me with a further explanation of how the investment operated. I still was not certain about how the process worked and I told this to Devine. Devine said that a presentation was being given in the next day or two by his solicitors and financial people to some other potential investors. Devine asked if I would like to attend and I agreed.

5. The presentation was held at the offices of Messrs Garland Hawthorn & Brahe, solicitors, in the city. It was only a relatively small group who attended being two other potential investors, Devine and a solicitor, Don Bundesen (`Bundesen'). The relatively small size of the presentation did not give me cause for concern as I was under the impression that similar presentations were being given on a regular basis to other potential investors. Devine told me that he thought one of the film producers, Rosa Colissimo would also have been present but she did not attend.

6. At the presentation, I was provided with a Film Investment Brochure (`the brochure'). Bundesen took us orally through the brochure and explained the limited partnership structure and that the investments were also supported by a number of larger investors including the Australian Film Finance Corporation and the Queensland Government. He also explained the tax relief that was available to investors but did not explain the procedure for compliance with or the requirements of the Income Tax Assessment Act 1936 (`the ITAA').

7. I was still coming to terms with how the investment operated and I did not ask any questions of Bundesen. However, another potential investor asked a lot of questions and they all seemed to be answered in a satisfactory manner. My main concern was that I could not be held liable for any further

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moneys than what I might invest and that my investment would be tax deductible. This was confirmed in the presentation.

8. After the presentation was completed, Devine asked me whether I now understood how the film investment operated. I told him that it was clearer and he asked whether I was ready to invest. I replied that I was still not ready and Devine said that he would send out two other people to my house to discuss it further with me.

9. I also asked to see the paper work that was involved in making the investment. Devine provided me with a blank Certificate of Contribution and a blank Investment Application Form. In relation to the Certificate of Contribution, Devine stated that they would be issued each year upon payment towards the film investments and they would be evidence of ownership of units in the limited partnership.

10. When the people Devine sent to my house arrived, they mainly spoke about selling insurance and representing AMP. After some time, I told the lady that I was not interested in the insurance but I asked her what she thought about the film investment. She said that there were some quite good benefits in making such an investment and then said words to the effect of `I guess you might as well go with Dan'.

11. After considering the matter further, I then decided to invest in the Australian films through Devine. I had previously used another accountant to prepare my tax returns for the three prior years. However, I had no other contact with the accountancy firm. Accordingly, when Devine recommend that he prepare my tax returns in addition to arranging the film investments, I agreed. I felt it was easier and made sense to attend to both matters at the one firm.

12. Shortly after deciding to invest in the Australian films with Devine, I was required to lodge my Income Tax Return for the 1990/1991 income tax year. In or about the month of August, 1991, I attended on Devine with my Group Certificate and other usual documentation required for a standard Tax Return. Devine advised that as I had paid the sum of SEVEN THOUSAND NINE HUNDRED AND SIXTY-FOUR DOLLARS NINETY-FOUR CENTS ($7,964.94) in income tax throughout the income tax year, I would need to invest the sum of TWO THOUSAND FIVE HUNDRED DOLLARS ($2,500.00) in units in the limited partnership for the film investment to obtain a full refund of that money. He also advised that his fee for preparing the tax return was ONE HUNDRED AND TWENTY DOLLARS ($120.00) and that this was to be paid separately from the purchasing of the units in the limited partnership.

13. As Devine required payment of the moneys `up-front', I went to my bank and obtained a bank cheque for the amount required. I returned to Devine by which time my tax return had been typed and was ready for me to sign. An Investment Application Form and Certificate of Contribution had also been completed by that time. Devine stated that it was necessary for me to sign the Investment Application Form. He would then attend to lodgment of it and the Certificate of Contribution with the Australian Securities Commission and the Australian Taxation Office (`the ATO') so that the claims could be properly made.

14. I briefly perused my tax return, the Certificate of Contribution and the Investment Application Form. I then signed my tax return and the Investment Application Form.

15. Approximately two (2) weeks later, I was telephoned to be advised that my refund cheque was available for collection. Upon attending on Devine to collect my refund cheque, Devine asked whether I would be interested in investing further money in the scheme. He said that if I invested TEN THOUSAND DOLLARS ($10,000) it was likely that I would receive a return of approximately ONE HUNDRED THOUSAND DOLLARS ($100,000) in two years time. He told me of an example when this occurred and said that even if the movie failed, my money would be returned in full because I would be repaid before other major investors like the Queensland Government and the Australian Film Finance Corporation. Devine told me that there was virtually no risk associated with the investment.

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16. As I was unused to investing my money in commercial transactions, I was still cautious about the investment. However, I was under the impression that if there was any problem with making the investments and receiving the tax relief, I would not have received my refund cheque.

17. Devine telephoned me on several occasions subsequent to my collection of my initial refund cheque in relation to making a further investment. In or about November, 1991, he telephoned and said that he was just about to do another movie and said words to the effect that `it looked as though it was going to be a real hit'. It was at that time I decided to invest TEN THOUSAND DOLLARS ($10,000.00) on the basis that I would receive interest payments at the rate of 15% per annum in June of the following years until the money was repaid, together with a percentage of any profits from the film.

18. Subsequent to making the investment, I telephoned Devine on a regular basis to discuss how the movies were proceeding. At all times he stated that everything was going well and usually provided me with an update of the status of the films.

19. In or about the month of June, 1992, Devine provided me with a cheque for ONE THOUSAND TWO HUNDRED DOLLARS ($1,200.00) which he advised was for the interest on the TEN THOUSAND DOLLARS ($10,000.00) I had invested. He explained that it was not ONE THOUSAND FIVE HUNDRED DOLLARS ($1,500.00) because a full year had not elapsed since investing the money but that in the following year the full amount would be payable.

20. Shortly thereafter, in or about the month of July, 1992, I was required to lodge my tax return for the 1991/1992 income tax year. The same procedure occurred as for the previous year but on this occasion, Devine advised that I need only invest ONE THOUSAND EIGHT HUNDRED AND SEVENTY-FIVE DOLLARS ($1,875.00) in units in the limited partnership to obtain a tax refund of TEN THOUSAND TWO HUNDRED AND TWENTY-FIVE DOLLARS EIGHTY-TWO CENTS ($10,225.82). He explained that be cause I had made the additional investment of TEN THOUSAND DOLLARS ($10,000.00), I only needed to make a smaller further investment to get a tax refund that was in excess of the previous year's refund.

21. I again received the full refund that Devine had told me I would receive. However, I did not wish to invest any further moneys in the scheme because I wanted to wait to see whether the films would in fact produce profits and be distributed to me. I felt satisfied that the payments I made to Dracon No. 42 Pty Ltd at the time of completing my tax return were safe because I saw the results of the investments in a relatively short period of time thereafter, namely in the form of a tax refund.

22. I continued to telephone Devine on a fairly regular basis to discuss my investments and how the films were progressing. At all times he stated that things were progressing well and continued to provide status reports. An example of such a status report was that he had been busy organising the cast for a particular film.

23. In or about June, 1993, I did not receive my second interest payment on my investment of TEN THOUSAND DOLLARS ($10,000.00). I telephoned Devine on a number of occasions and I was also told not worry and that it would be available very shortly and that additional interest payments would be made to compensate for the delay.

24. Shortly afterwards, in or about the month of July, 1993, it became time to lodge my tax return for the 1992/1993 income tax year. Devine had moved offices to Park Road and he advised me that he was now just looking after the film investment aspect of matters because of his expansion. He also stated that he had arranged for Bell & Associates, Accountants, to do all the tax aspects and that they were now able to lodge the tax returns electronically and that the refunds would be available within seven (7) days.

25. As occurred in the previous two (2) years, I attended Devine's office at his new address. I cannot recall whether there was any signage showing that it was the office of Bell & Associates or Dracon No 42 Pty Ltd,

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but I saw Devine's secretary, Lyn La Rosa (`La Rosa'), and therefore assumed that it was Devine's office.

26. Devine took me into the room and said that Bob McDonald (`McDonald') would come in to deal with the tax aspect. Devine then left the room and I saw McDonald come from another room in the same office. McDonald then completed the tax return whilst I was present on the basis of the documentation I had brought with me. Devine then returned to the room and McDonald left. Devine then made some calculations and advised that I would need to invest THREE THOUSAND ONE HUNDRED AND TWENTY-FIVE DOLLARS ($3,125.00) in purchasing units in the limited partnership to obtain a full tax refund of NINE THOUSAND ONE HUNDRED AND SEVENTY-FIVE DOLLARS SEVENTY-FIVE CENTS ($9,175.75).

27. McDonald apparently had nothing to do with the film investment aspect and I understood that McDonald and Devine had separate roles, although they may have been closely associated.

28. I then left Devine's office and obtained a bank cheque for THREE THOUSAND ONE HUNDRED AND TWENTY-FIVE DOLLARS ($3,125.00) and returned to sign the documentation as usual. I also paid ONE HUNDRED AND TWENTY DOLLARS ($120.00) in cash to La Rosa and she provided me with a receipt from Bell & Associates. I eventually received my tax refund cheque in the sum of NINE THOUSAND ONE HUNDRED AND SEVENTY-FIVE DOLLARS SEVENTY- FIVE CENTS ($9,175.75) but it took a little longer than usual. La Rosa eventually called me at work and said that the cheque was available for collection and that I had better collect it now before Devine could get it because Devine was short of money.

29. I collected the refund cheque and confronted Devine as I was beginning to become concerned about the additional TEN THOUSAND DOLLARS ($10,000.00) that I had invested.

30. Devine made excuses for the delay and attempted to gloss over my concerns. He said that there were no problems.

31. However, I later became aware that the ATO was raising some concerns about the film investments. Again, I was reassured both verbally and in writing that their queries would be answered and there should be no problems. This continued for some time and, whilst I was concerned, Devine kept reassuring me and other investors that there was nothing to be concerned about.

32. When it became time to lodge my tax return for the 1993/1994 income tax year, Devine stated that he could continue to do the tax returns but only for about twelve people. I was somewhat sceptical at this stage but Devine had told me that he was an accountant and had previously worked in the ATO. I therefore told him that I would only invest a sum of ONE THOUSAND EIGHT HUNDRED AND SEVENTY-FIVE DOLLARS ($1,875.00) into purchasing units in the limited partnership. This was the amount that I had invested in the 1991/1992 income tax year and it was the smallest amount that I had invested throughout the entire period.

33. The same procedure occurred but instead of making the bank cheque payable to Dracon No 42 Pty Ltd, it was made payable to Milton Finance Company Pty Ltd as Devine had said that the new company was necessary as a result of his expansion.

34. The deductions claimed in that tax return were subsequently disallowed by the ATO. I therefore approached Devine and demanded repayment of the sum of ONE THOUSAND EIGHT HUNDRED AND SEVENTY-FIVE DOLLARS ($1,875.00) which I had paid to Milton Finance Company Pty Ltd. Devine eventually agreed to provide me with a refund but the cheque was subsequently dishonoured upon presentation.

35. I have never received repayment of this amount from Devine nor of any other amounts for prepaid interest nor of the investment of TEN THOUSAND DOLLARS ($10,000.00). This totals the sum of NINETEEN THOUSAND THREE HUNDRED AND SEVENTY-FIVE DOLLARS ($19,375.00). The only money I received from Devine or his companies was ONE THOUSAND TWO HUNDRED DOLLARS ($1,200.00) received as interest

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on my investment of TEN THOUSAND DOLLARS ($10,000.00).

36. At no time prior to the commencement of this Application was I aware that the tax agent registration number appearing on my 1991 and 1992 income year taxation returns was not that of Devine, but rather of Mavis Ena Smith. Further, I had never previously heard of, known or met any person by that name.

37. It was my understanding that Devine was a registered tax agent and this was confirmed to me in seeing Devine noted as the `contact' on the taxation returns for those years.''

9. In the course of his oral evidence the applicant said that Bundesen had said that the investment in the films was a good investment, which was being promoted by the Government. The applicant also said that Bundesen said amounts invested were 100% tax deductible and the documentation had all been cleared with the relevant authorities. The applicant was quite clear in his evidence that Bundesen said that the investors would be able to claim the tax deduction. In his oral evidence the applicant also made it clear that he understood that he had no obligation for repayment of loans, and that he was required to make interest payments in advance. He also said in the course of that evidence that he was aware that Devine was calculating amounts necessary to reduce his taxation liability and payments were apparently related to those calculations.

10. The applicant stated in his oral evidence that prior to August 1991 he had not had any contact with Devine and his previous tax returns had been prepared by another tax agent. The applicant did not explain as to why he had changed to having his tax returns done by Devine, although it seems to have followed as a natural consequence of his approach to Devine in relation to the so-called film investments. He also said that he did not know Mavis Enid Smith who, it was suggested during the course of the hearing, was the person whose registration number as a tax agent was used by Devine for the purposes of lodging tax returns in the Taxation Office. The applicant did say, however, that he paid Devine a fee of $120 for lodgment of each tax return and that amount was paid in cash. Monies invested in the so- called film scheme were, however, paid to Devine by bank cheque.

11. In the course of cross-examination the applicant agreed that he had attended three different offices belonging to Devine over the three year period in which he had contact with him. The applicant also made it clear, in the course of cross-examination, that he understood that Garland Hawthorne and Brahe were Devine's solicitors and were not acting for him. He said further that he had not himself consulted solicitors in relation to the arrangements for the film investments. The applicant agreed in cross-examination that he had not taken any steps to check up on Devine's advice, nor had he taken any steps which were in any way intended to check on the allowability of the claimed deduction of $25,000.00 for the film investment. The applicant was generally vague as to the detail of the arrangements, and seems to have had a very poor understanding of the fundamental facts because he said in the course of cross- examination that his understanding of the loan agreement was that he was borrowing the amount of the tax which was to be refunded to him and it was not his understanding that he was, in fact, borrowing (at least on the documents) $25,000.00. He did say in the course of his evidence that he was not shown a copy of Schedule A to the loan agreement and that may well explain the reason for his not understanding the amount that was the subject of the loan. He did, however, have an understanding that he had not borrowed $25,000.00 on each occasion. He further understood that he was not under any liability to repay capital amounts which were said to be loans.

12. I was left with the distinct impression that the applicant is naive in the context of both taxation and investment matters that is consistent with both his history and his background. I do not state that as a criticism of the applicant but rather as an explanation of how the circumstances in which he now finds himself came about. On any reasonable view of the applicant's evidence, it is difficult to understand how he understood that Devine was making these arrangements for film investment without any apparent payment or fees going to Devine from the client, in this case the applicant. Perhaps what is even more surprising is that the applicant seems to have accepted that

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the Commissioner of Taxation had suffered a transformation of such magical and surprising proportions as to turn himself into Father Christmas. The applicant was simply unable to explain before the Tribunal as to how he thought that he was entitled to a tax deduction of $25,000.00 when, in fact, he had not outlaid any of that money and had only paid out what was said to be interest in advance, amounting to a much lesser amount approximating ten per cent of the amount claimed as a tax deduction.

13. Exhibit 4 includes a copy of a tax return in the name of the applicant for the year of income ended 30 June 1991. The document is not dated, but the applicant agreed that the signature appearing on the copy document was his signature. The return disclosed income as an employee with tax instalment deductions amounting to $9,236.00. The return also discloses income by way of interest, certain claims are made in relation to work related deductions, and a claim for deduction of $25,000.00 is made in relation to film industry incentives, with the details showing the name of a company, ``Devine Films Pty Ltd''. By notice of assessment dated 11 September 1991, the respondent Commissioner notified assessment of the applicant's taxable income, the tax payable on that income, and a refund of $7,964.00.

14. Exhibit 4 also includes a copy of a document entitled ``Certificate of Original Contribution''. That document is dated 28 June 1991 and is addressed to the applicant. The document is in the name of a company, Dracon 42 Pty Ltd, and bears the common seal of that company. The document certifies that the company has received an amount of $25,000.00 as an original contribution by the applicant as a limited partner in the Von Kessell Dossier Production Limited Partnership, established for investment in the production and exploitation of a motion picture provisionally entitled ``The Von Kessell Dossier''.

15. A copy of a document entitled ``Plaza Productions Partnership Investment Offer'' is also included in Exhibit 4. This document runs to 41 pages and is in the nature of a prospectus in relation to the production of two films, namely ``The Von Kessell Dossier'' and ``Red Rain''. The investment offer document is informative and is unexceptional in its content, given the nature of the document. There is considerable detail in the offer as to the basis on which the investment in the films can be effected through borrowing from two financiers. It is not clear to the Tribunal as to whether the applicant in fact read this document although there is no reason to doubt that he did so. What is unclear to the Tribunal, if the applicant did read the document, how he thought that the arrangements that were entered into by Mr Devine were somehow or other in accordance with the terms of the investment offer because, although it is not necessary that I go into the details of that document, a fair reading of it indicates that Devine conducted his affairs in a way that is quite inconsistent with the proposal as set out in the investment offer.

16. Exhibit 4 also contains a copy of an income tax return in relation to the year of income ended 30 June 1992 in the name of the applicant. That return discloses income as an employee, and tax instalment deductions of $9,550.00 taken from that income. The return also discloses claims for certain work related deductions, and a claim for film industry incentive of $25,000.00. By notice of assessment dated 29 July 1992, the respondent Commissioner notified an assessment of the applicant's income tax liability for the year of income ended 30 June 1992, assessing the taxable income at $10,886.00 and a refund of tax amounting to $10,225.00. The claim for the $25,000.00 film incentive deduction is supported by two certificates of original contribution, one for an amount of $15,000.00 and the other for an amount of $10,000.00 in similar terms to the previous certificate mentioned above, except that these certificates relate to the contribution by the applicant as a limited partner in the ``Gold Band Silver Production Limited Partnership''. The explanation for two certificates appears to be that the applicant, in fact, gave Devine $10,000.00 of his own funds during the year ended 30 June 1992 and therefore entered into a loan agreement in relation to the balance of $15,000.00. The amount of $10,000.00 was the subject of a bank cheque drawn by the Commonwealth Bank on 8 November 1991 in favour of Dracon 42 Pty Ltd.

17. I am satisfied, and I so find, that the applicant was content to rely on the advice of Devine, and, having been assured by Carey that the arrangements entered into in relation to film investments had worked for Carey, the

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applicant saw no reason to consult solicitors or any other person for advice. I am also satisfied, and so find, that the applicant relied upon, and adopted, advice given by Devine without ever considering the necessity to seek independent advice in relation to those arrangements. In adopting Devine's advice the applicant was no doubt influenced by what he had heard at the offices of the solicitors for Devine. There is no doubt in my mind that the applicant always understood that those solicitors were, in fact, acting for Devine and not acting for the applicant.

18. I turn now to the evidence of the chartered accountant. In June 1992 she was seeking employment and attended upon the Commonwealth Employment Service, which arranged an interview for employment with Devine. An essential qualification for the position offered by Devine was that the applicant be a registered tax agent. In the result, the chartered accountant was employed by Devine, but the circumstances of that employment were, at the outset, somewhat strange and clearly put the accountant on notice that all was not well. She made application to the Australian Taxation Office to use the electronic lodgment system and for the first three days of her employment worked from home because Devine had told her there were no desks available for use at his office. Subsequently she commenced work at Devine's office in Paddington and was doing tax return preparation work. The draft tax returns were then passed to another person who arranged for the electronic lodgement of these draft tax returns with the Taxation Office from her home computer. She was not, apparently, employed by Devine as such, although no doubt was paid by him for the service. The accountant became suspicious of matters that were being transacted by Devine and although particulars were set out in the statement of evidence, I do not propose to detail them in these reasons for decision. Suffice to say that the result was that the accountant made contact with an officer of the Tax Agents' Board and provided information to that officer in relation to the activities of Devine, with particular reference to the film investment scheme. Exhibit 5 contains a copy of a hand written, but lengthy, letter dated 20 July 1992 which is addressed to the officer of the Tax Agents' Board and which details various matters in relation to the accounting practice conducted by Devine. The witness also withdrew her application to the Taxation Office to be a person entitled to use the electronic lodgment system but did not give any explanation of that withdrawal to the Taxation Office itself.

19. It seems, and it is reasonable to infer, in my view, that the Tax Agents' Board passed the information on to the Taxation Office, and by September 1992 it would seem that the Taxation Office commenced enquiries in relation to Devine's activities. That investigation resulted in the matter being referred to the Director of Public Prosecutions in September 1994 and it is understood that further enquiries are still being conducted by officers of the Australian Federal Police and the Queensland Police. The evidence of Trevor William Mills established that the Queensland Police Fraud Squad is conducting investigations which involve at least 60 people of various backgrounds who have, apparently, entered into arrangements similar to those entered into by the applicant in these proceedings. It appears from the evidence of Detective Mills that Devine's present whereabouts are uncertain. Devine has, however, been charged with offences in relation to s 251L and s 251O of the Act; Exhibit 9 indicates that Devine was convicted on all charges, and fined $6,000.00 in lieu of six months imprisonment by the Brisbane Magistrates Court. That exhibit also indicates that although the matter was referred to the Taxation Office by the Tax Agents' Board in September 1992, no active investigation of the matter took place until April 1993, when a taxation officer commenced an investigation into the claims for film deductions for a number of Devine's clients. Exhibit 8 establishes that the Taxation Office has apparently been aware of Devine practising as an unregistered tax agent for over ten years, although it is not clear as to when the Taxation Office first became aware of Devine's activities. It seems, however, that the Taxation Office is of the view that Devine is continuing to operate under the name of Bell and Associates. Somewhat surprisingly the Taxation Office has conceded that documents with respect to Devine prior to 1990, apparently relating to previous investigations into his activities, have been destroyed by that office. While the Tribunal does not doubt that the Taxation Office acted in accordance with the

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Australian Archives rules in relation to records, it might be appropriate for the Taxation Office and Australian Archives to reconsider whether documentation relating to persons who carry on business as unregistered tax agents and associated activities, should have a longer retention period prescribed under the archives legislation.

20. I found the applicant to be a witness of truth in relation to his evidence before the Tribunal, which I found to be frankly stated and clearly very embarrassing to him. I am also satisfied, and I so find, that when the applicant signed his income tax returns for the years of income ended 30 June 1991 and 30 June 1992, he believed that he was entitled to make the claim for the film incentive deduction on the basis of the advice which he had received from Devine and Devine's solicitors and perhaps also the original advice he had received from Carey. I am not satisfied that I can make the same finding in relation to the year of income ended 30 June 1993 because by the time the applicant lodged this tax return he had received a warning from the Taxation Office and an indication from that office that such claims were not allowable. That is not to say that I consider that the applicant should have adopted the advice of the Taxation Office, but rather that the applicant was put on notice that the allowability of the claims was in dispute and it was therefore, in my opinion, incumbent on the applicant to make further enquiries and to get independent advice in relation to the arrangements.

21. I turn now to consider the operation of the provisions of Part VII of the Act.

22. There does not appear to be any dispute that the applicant has made a statement under s 223(1) when he lodged his tax return for each of the years ended 30 June 1991 and 30 June 1992, and that was a statement to a taxation officer for a purpose in connection with the operation of the Act. I doubt that there can be any real argument that an income tax return falls within paragraph (a) of s 223(1). Certainly it has not been suggested to me that an income tax return, duly signed by the taxpayer, does not come within the terms of that provision. The question, then, is whether the applicant made a statement which was false or misleading in a material particular. That matter seems to be put beyond argument by s 223(8). The next question is: were those returns made in such a way that they included a false or misleading statement? The false or misleading statement in issue is the claim for a film incentive of $25,000.00. It is now well established that a statement is a false statement if that statement is wrong, and it is not necessary to establish whether there were any elements of intent in the making of the statement. The test is whether, on an objective review of the facts, the particular statement made to the taxation officer was wrong in the circumstances. In this regard see
FC of T v Turner 84 ATC 4161 and
Reliance Finance Corporation Pty Limited v FC of T 87 ATC 4146.

23. It seems to me that on any objective assessment of the applicant's 1991 and 1992 income tax returns each return included a statement that was manifestly wrong and was therefore a false statement for the purposes of s 223. In particular, the claim for a deduction of $25,000.00 in relation to the year of income ended 30 June 1991 was based upon a certificate which the applicant must have known had been back dated from August to June because the applicant first consulted Devine in August and Devine produced a certificate dated June. I am satisfied, therefore, that in relation to that year, the statement made by the applicant was not only wrong, but the applicant knew it to be wrong when he made the statement. The matter is not so clear in relation to the next year of income ended 30 June 1992, but I am satisfied that the claim again involved a statement which was wrong because no payment was made for the production of films, although the deduction claim of $25,000.00 was made in good faith by the applicant. I am therefore satisfied that the applicant made false statements within the terms of s 223 in relation to both the years of income ended 30 June 1991 and 30 June 1992, and I so find. In coming to that conclusion I am satisfied that the statements were material and the returns can therefore be said to have been false in a material particular.

24. Turning to the operation of s 227, which provides a discretion which, by virtue of s 43 of the Administrative Appeals Tribunal Act 1975, vests in this Tribunal for the purposes of the present applications, should the Tribunal remit the whole or any part of the additional tax imposed by s 223? The respondent Commissioner has published guidelines in relation to the remission of additional tax and those guidelines have been marked as exhibits

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in these proceedings. Those guidelines are contained in an income tax ruling (IT 2517) which was published by the Commissioner of Taxation on 15 February 1989. The ruling is clearly only in the nature of a guideline for delegates and authorised officers exercising the relevant discretion; that is made clear in paragraph 7 of the ruling where it states that the ruling sets out, for the information of officers, a guide as to the manner in which the discretion might generally be exercised. I do not understand the ruling itself to attempt in any way to fetter the exercise of the discretion by Deputy Commissioners as delegates of the Commissioner, or by officers of the Taxation Office who are authorised to act on behalf of those delegates, nor do I understand this Tribunal to be in any sense fettered by the guidelines which have been published by the respondent. Clearly the Tribunal has an unfettered discretion under s 227, but in exercising that discretion, the Tribunal must be careful not to take into account any irrelevant issue which does not arise in the context of the operation of s 223 (
Hilton v FC of T 92 ATC 4534).

25. The respondent's ruling divides categories of behaviour by taxpayers into various categories which are set out in the ruling as follows:

Deliberate evasion

Recklessness (short of deliberate evasion)

Carelessness

Carelessness of a minor nature

Inadvertent error - honest mistake

Contentious item

26. One of the reasons for categorising the omissions is that the respondent has adopted a set of guidelines which have two parts. One part determines a culpability component and the other part determines a time payment factor similar to the operation of s 170AA. The guideline seems to be confused as to the concept of the imposition of additional tax in that the Act imposes the additional tax and the discretion of the Commissioner is limited to remission of the amount imposed by the Act, either in whole or in part.

27. In relation to the year of income ended 30 June 1991, the amended assessment notified to the applicant on 12 January 1994 assessed additional tax at $3,537.98, being a culpability component at 40% and $1,851.09, being a per annum component at 10.6 per cent. Although the respondent's office seems to have been confused as to what it did, by the time the matter came before the Tribunal for the hearing the respondent had advised the applicant and the Tribunal that no amount was assessed under s 170AA and that the whole amount was penalty imposed by s 223. By a subsequent amended assessment the respondent reduced the culpability component to $1,326.74, which is said to be at a rate of 15 per cent. That means, in the terms of the income tax ruling, that the respondent was satisfied that the false statement made by the applicant came within the carelessness area of the guidelines. The apparent explanation for the Commissioner's revision of the categorisation of the additional tax and, in particular, the culpability component in the Commissioner's calculations, is that the false statement was thought to come within the carelessness class, rather than the recklessness class, because the Commissioner had understood that the $25,000.00 claimed had actually been paid over by the applicant, at least to Devine if not to a film producer. The proceedings in the Tribunal established beyond doubt that, in fact, no payment was made by the applicant of any part of the $25,000.00, although the applicant did pay an amount to Devine which was said to be interest in advance. No claim was made in the taxation return for this interest in advance. It will be apparent, therefore, that the Commissioner has been generous in the context of the Commissioner's own guidelines in the remission of the additional tax.

28. Mr Bickford says in mitigation that I should take into account the fact that the applicant was the innocent dupe of a conman, namely Devine. I am satisfied that that, in fact, is the case; that he was encouraged by his friend Carey to seek to reduce his taxation liability, and, as a consequence of his enthusiasm to achieve that end, he fell into the clutches of an artful conman who tricked him into believing that the claim in relation to film incentives was a valid claim. What was not really explained before me is how the applicant thought that such a claim could be valid when in fact no funds had been outlaid in relation to the claim for $25,000.00. I well understand the argument put by Mr Bickford, that such claims can be financed by borrowings, but the circumstances of this case suggest that the applicant did not

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understand that he had in fact borrowed $25,000.00 and, as Ms Holmes carefully pointed out, the loan agreement was, in fact, not effective as a loan agreement at all, and, on any reasonable view of the material, the applicant could not have and did not come to a conclusion that he had borrowed $25,000.00. It is clear on the evidence that he entered into the arrangement in the knowledge that he would not be in debt and I must therefore infer that whatever his understanding was of the so-called loan agreement, that did not include an understanding that he had borrowed $25,000.00, and that those monies had been paid over to a film producer. It would not be reasonable to infer that he had that understanding because such an inference would be inconsistent with the facts. There was no loan to raise funds to pay monies to a film producer on behalf of the applicant, and I so find.

29. I have also taken into account the delays on the part of the Taxation Office in pursuing the matter after the chartered accountant drew the attention of the Tax Agents' Board to the activities of Devine, and the Tax Agents' Board duly drew those matters to the attention of the Taxation Office so as to cause an investigation to be commenced in September 1992. There is no explanation before the Tribunal, other than a chronological summary of events, as to the delay that occurred between the time that the information was passed to the Taxation Office and the making of the amended assessment notified on 12 January 1994. Furthermore, I am not satisfied that s 223 operates in a way which implies that there is a component which is described by the respondent as the per annum interest component, similar to the amount which is clearly imposed, but not in the present case, by s 170AA of the Act. Taking all these factors into account and taking the material before the Tribunal into account, I am satisfied that the applicant was the innocent victim of a dupe and that some allowance should be made for that. I would, therefore, (adopting the respondent's general criteria in the income tax ruling, but without being in any way fettered by that criteria), remit the additional tax so as impose an amount equal to 30 per cent of the tax payable by the applicant on the amended assessment which issued on 12 January 1994. On the material before me the additional primary tax payable on the amended assessment was an amount of $8,844.96, and the additional tax imposed by s 223 was therefore an amount of $17,689.92. I would remit 85 per cent of that amount so as to reduce the additional tax imposed to an amount of $2,653.00. There will be no separate amount which could be described as an amount for the time or interest. The additional tax assessed will therefore be reduced by $524.83.

30. In relation to the year of income ended 30 June 1992, there are some differences in relation to that year in that the applicant again claimed a deduction for $25,000.00 film industry incentives, but also claimed a deduction for an amount in relation to the interest said to have been paid in advance, which was an amount of $1,875.00. Another point of distinction is the fact that during the year the applicant paid an amount of $10,000.00 from his own funds as part of the $25,000.00 contribution claimed as film incentive. The payment is proved in Exhibit 4. The situation is, therefore, that the amounts of $10,000.00 and $1,875.00 were actually paid out by the applicant and there is therefore only a net figure of $15,000.00, which was said to have been obtained by loan but, of course, on all the material before the Tribunal, simply was not and could not have been obtained by loan. In all other respects the circumstances in relation to the year of income ended 30 June 1992 are similar to the circumstances that existed in relation to the year of income ended 30 June 1991. Taking all the relevant factors into account and also taking into account in particular the additional fact of the payment of $10,000.00, I am satisfied that the appropriate remission of additional tax imposed by s 223 in relation to that year of income is to remit 90 per cent of the additional tax imposed by the section. The further tax payable in relation to the 1991 year was an amount of $8,777.06, so that the additional tax imposed by s 223 is an amount of $17,554.12. Remission of 90 per cent of that amount imposed by s 223 will result in additional tax of $1,755.00 being imposed in relation to the year of income ended 30 June 1992. The additional tax assessed will therefore be reduced by an amount of $374.16.

31. Different considerations apply in relation to the year of income ended 30 June 1993 because of the change in the law and also because of relevant changes in the factual situation of the applicant's position.

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32. By letter dated 30 July 1993, which, as I have already indicated, seems to involve a lengthy delay from the time the Taxation Office first started investigating the claims in relation to the film industry incentives made by clients of Mr Devine, the Taxation Office wrote to the applicant referring him to his 1991 and 1992 tax returns, and advising that the film industry incentive claims were to be disallowed and giving reasons for that decision. The letter addressed to the applicant went on to say that the amendments to the 1991 and 1992 ``returns'' would issue in due course. I understand this reference to ``returns'' to, in fact, mean notices of amendment of assessments, and I have no doubt that the applicant understood it in the same sense (T19). Exhibit 4 includes a copy of a notice of assessment in relation to the year of income ended 30 June 1993 issued to the applicant by the respondent on 25 August 1993, which was nearly four weeks after the respondent's letter of 30 July 1993. That notice of assessment was made on the basis that the applicant's claim for a deduction of $25,000.00 in relation to film incentives and $3,125.00 in relation to interest on loans had been accepted by the Taxation Office. No explanation was given to the Tribunal as to why the Taxation Office, having advised the applicant that the claims were for 1991 and 1992 were to be refused, then accepted the claim in relation to the 1993 year. Certainly no additional information had been supplied to the Taxation Office, because there is nothing in the material before me which would lead me to conclude that the Taxation Office would make any different decision in relation to the 1993 assessment as it had made, and notified in July 1993, in relation to the 1991 and 1992 assessment. It is relevant to note that the applicant's taxation return for the year of income ended 30 June 1993 was dated 6 July 1993, and it might be reasonable to presume that it was lodged in the Taxation Office prior to the receipt by the applicant of the Taxation Office letter 30 July 1993.

33. Sections 226G, 226H, and 226J, of the Act depend for their operation upon a taxpayer having a tax shortfall for a year. A tax shortfall in defined in s 222A as meaning the amount, if any, by which the taxpayer's statement of tax for that year at the time at which it was lowest, is less than the taxpayer's proper tax for that year. The same section defines ``taxation statement'' in relation to a person to mean:

• ``(a) a taxation officer statement made by the person; or
• (b) a taxation purpose statement made by the person; but does not include a statement
• (c) in which the income tax law is treated as applying to the taxpayer in respect of a year of income in relation to another matter; and
• (d) that is made:
  • (i)...
  • (ii)...''

34. A ``taxation officer statement'' is defined in some detail in the section but it is sufficient for the purpose of this application that the lodgment of a taxation return comes within the definition of taxation officer statement. The effect of the definition of ``tax shortfall'' depends upon the meaning of the defined term ``statement tax''. I had some difficulty with the definition of ``statement tax''. The apparent intention is to be gleaned from the words of the definition and those words, in my view, are somewhat equivocal and may not be in accord with the meanings that have been attributed to them by the respondent in his Taxation Ruling TR 94/4. Paragraph 5 of that ruling reads as follows:

``A tax shortfall is defined in section 222A (and a franking tax shortfall in 160ARXA), and broadly means, in relation to a taxpayer and a year of income, the difference between the tax properly payable by the taxpayer and the tax that would have been payable by the taxpayer if it were assessed on the basis of the taxpayer's return for the year of income.''

The respondent appears to have proceeded, in this case, on the basis of the meaning of tax shortfall described as set out above. However, essential to that concept is the defined meaning of statement tax and that reads as follows:

```Statement tax', in relation to a taxpayer, a year and a time, means the tax that would have been payable by the taxpayer in respect of that year if it were assessed at that time on the basis of taxation statements by the taxpayer after allowing the credits claimed by the taxpayer;''

35. The difficulty I have found with this is that the Commissioner proceeded, in the knowledge of his letter of 30 July 1993, to

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allow the applicant's claims for film incentives for the 1993 year of income (the applicant having made the same claim without any additional information in the 1993 return, apparently lodged prior to receiving the Commissioner's letter), that is, after having notified the the applicant that his claims for film incentives for the previous years years of income would be disallowed. It seems to me that there must be a doubt that the tax that would have been payable by the taxpayer in respect of that year, if it were assessed at that time on the basis of taxation statements by the taxpayer, cannot be said to be the amount that would be assessed as per the return, but rather the amount that would be assessed as per the return and information already in the possession of the Commissioner. I do not read the definition of statement tax as meaning that the Commissioner is to assess in a vacuum of knowledge other than the statements that are made on the taxation statement.

36. At the time of making the 1993 assessment, the Taxation Office knew precisely who it was dealing with and that the applicant and a number of other people had been the subject of a confidence trickster. By that time the Taxation Office was satisfied that the claims for film incentive deductions emanating from Devine were fraudulent and had no basis on which they could be allowed in terms of the Act. Notwithstanding that, the Taxation Office went ahead and made an assessment which allowed the applicant's claims, albeit that the Commissioner was in full knowledge that the claims were not allowable. It seems to me that that was the situation when the applicant lodged his 1993 tax return in early July 1993. The Commissioner had been conducting his enquiries for some time when the return was lodged. While not entirely satisfied as to the correct meaning of the defined term ``statement tax'', I have come to the view that the intention of the definition is to mean the tax that would have been payable if the taxpayer had been assessed in accordance with the taxation return and without taking other information into account. That, to my mind, causes a somewhat unsatisfactory outcome in the sense that the taxpayer, in effect, is, at least in some instances, likely to be called upon to pay additional tax because of the operation of the Act in circumstances where the real cause of the underpayment of tax has been a failure by the Taxation Office to take into account relevant material already in its possession. I well understand the concepts of self assessment, but it seems to me that in this day and age of computers, the capacity should be there for the Taxation Office to ensure that assessments are made correctly irrespective of incorrect information supplied by a taxpayer when the correct information is already in the possession of the Taxation Office.

37. Taking the view that I do of the meaning of statement tax, I am satisfied that there was a tax shortfall in the year of income ended 30 June 1993 and that I must, therefore, consider the operation of s 226G, s 226H, and s 226J. There is nothing in the material before me to suggest that the applicant had any intentional disregard of the law unless it can be said that the applicant deliberately adopted the advice of Devine to that effect. There is nothing in the evidence to suggest that Devine gave that kind of advice. Rather it was the case that Devine is an artful confidence trickster, and gave the applicant very plausible advice at all stages where the applicant was dealing with him. I am satisfied, and so find, that the applicant in fact, until the late stages of this affair, had no reason to doubt that the advice that he was being given by Devine was other than correct advice. It is easy with the benefit of hindsight to make a judgment as to whether the applicant was being stupid in accepting that advice, but I have taken into account the fact that the applicant has no working knowledge of taxation laws, is totally unsophisticated in legal concepts and would be easily persuaded by a confidence trickster to accept what sounded to be plausible advice. Against that is the fact that the applicant seems to have had a disregard for documents and lacked any concern to have the documents checked by a person who might be more knowledgeable than himself. However, the evidence of Detective Mills illustrates that at least 60 persons were similarly taken in by the arrangements.

38. I am not satisfied that the applicant had any intentional disregard for the provisions of the income tax law, but I have considered whether by adopting the statements of Devine and, in particular, adopting Devine's advice, the applicant also adopted Devine's apparent intentional disregard of the law. I am not satisfied that I should make such a finding and I do not think that the evidence justifies that

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finding being made in the circumstances of this case. I am satisfied, however, that there was an element of recklessness about the applicant's behaviour in relation to the lodgment of the 1993 income tax return. Recklessness is a concept known to the law, and perhaps better known in the context of criminal law, but my understanding is it should be accepted as meaning ``having no regard for the consequences of an action''. The Shorter Oxford English Dictionary defines the meaning as ``careless of the consequences of one's actions; heedless (of something) lacking in prudence or caution''. Similar meanings are given by the Macquarie Dictionary. In
Derry v Peek (1889) 14 App Cas 337 at 374, Lord Herschell gave a meaning of reckless as ``careless whether it be true or false''. In tax ruling TR 94/4, the ruling has gone to some length to explain the respondent's understanding of the term ``recklessness'' and, in effect, describes the term as meaning gross carelessness. I think the meaning goes beyond gross carelessness and I think there must be some disregard for the consequences before it can be said that an action is, in fact, reckless. I am satisfied that that applies on the circumstances of this case in relation to the 1993 year because by mid 1993 the applicant was determined to pursue the matter, apparently without regard to the consequences; no doubt that was partly due to the encouragement he received from Devine, but I am satisfied that in accepting Devine's advice without seeking further advice from an independent source, the applicant did go beyond carelessness and entered the area of recklessness when lodging the tax return.

39. A concept of recklessness is also appropriate, in my view, to the actions of the Commissioner in relation to the 1993 assessment. I am well aware, as I have already said, of the system of self assessment but that does not, in my view, absolve the respondent from a responsibility to ensure that assessments are made which take into account information which is available to the respondent. It is reasonable to expect that the Taxation Office would take some action to ensure that assessments made in relation to clients of Devine would be checked to ensure that the fraud which was being perpetrated on the revenue was not allowed to continue. There was, therefore, in my view, an element of recklessness in the way in which the Taxation Office went about making the assessment and it might have been more prudent either to defer the making of the assessment, and thereby avoid making a relatively large refund to the taxpayer, or assembling the information so as to make a correct assessment of the taxpayer, if it was thought necessary to make an assessment, as soon as possible.

40. I am satisfied that there was an element of recklessness in both the actions of the applicant and the Taxation Office in the context of the making of the assessment for the year of income ended 30 June 1993. I think, in the circumstances, justice will be done if I remit half of the additional tax imposed by s 226H of the Act. The respondent did not initially remit any additional tax imposed by s 226H and assessed the full amount of $4,352.89. However, on reconsideration, the respondent reduced the additional tax assessed under s 226H to $1,305.86, that is, 30 per cent of the penalty tax imposed by s 226H. The effect of the Commissioner's decision was to remit 70 per cent of the additional tax imposed by the section.

41. The effect of the Tribunal's decision will be to increase the penalty tax imposed by s 226H on the basis that the Tribunal cannot see any grounds for remitting more than 50 per cent of the tax imposed by the section, given the conduct of the applicant and, in fact, if the Taxation Office had not contributed to the situation by its own conduct, I would have been of the view that there was no ground for any remission of tax under s 226H in the circumstances of this case. However, the Tribunal's decision will be to set aside the respondent's decision in relation to the year of income ended 30 June 1993 and substitute a decision remitting the additional tax imposed by s 226H to an amount of $2,176.00.

42. The Tribunal's decision in relation to each application will therefore be as follows:

• (a) In relation to the year of income ended 30 June 1991: the objection decision under review be set aside and there be substituted therefor a decision that the additional tax imposed by s 223 of the Act be further remitted to an amount of $2,653.00;
• (b) In relation to the year of income ended 30 June 1992: the objection decision under review be set aside and there be substituted therefor a decision that the additional tax

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  ATC 677

  imposed by s 223 of the Act be further remitted to an amount of $1,755.00;
• (c) In relation to the year of income ended 30 June 1993: the objection decision under review be set aside and there be substituted therefor a decision that the additional tax imposed by s 226H of the Act be remitted to an amount of $2,176.00.

43. I will certify that these proceedings have terminated in a manner favourable to the applicant. I have done so on the basis that a single fee was paid pursuant to a direction by a Deputy Registrar and the overall result of the three applications has favoured the applicant by a small amount.