Decision impact statement

Shin and Commissioner of Taxation

Court Citation(s):
[2010] AATA 1012
2010 ATC 10-166
(2010) 81 ATR 627
[2010] AATA 1013
(2010) 81 ATR 634

Venue: Administrative Appeals Tribunal
Venue Reference No: 2007/2795 - 2798; 2007/2802 - 2805
Judge Name: O'Loughlin SM
Judgment date: 13 December 2010
Appeals on foot:
No.

Impacted Advice

Relevant Rulings/Determinations:

• MT 2008/1
• MT 2008/2

Subject References:
Penalties
Reasonable care
Reasonably arguable position
Remission of penalty

Précis

Outlines the ATO's response to these cases which concerned whether shortfall penalties were payable under the former section 226G of the Income Tax Assessment Act 1936 (ITAA 1936) and Subdivision 284-B of Schedule 1 to the Taxation Administration Act 1953 (TAA), and whether any penalties should be remitted in full.

Brief summary of facts

The taxpayers, a husband and wife, invested in a retirement village syndicate in the 1999 income year, each outlaying $100,000 on entering into the syndicate. Each taxpayer claimed deductions of $400,000 in their income tax returns for that year, based on the total amounts committed to the syndicate in that and future years, producing carry forward losses in the 2000 and 2001 years. On audit, the deductions allowed in the 1999 year were reduced to $100,000. Penalties were assessed on tax shortfalls said to have been caused by a failure to take reasonable care (25%), reduced by 80% to 5% for voluntary disclosures made before the taxpayers were informed of the start of the audits.

The facts concerning the syndicate were materially no different from those considered in Malouf v FCT (2008) 250 ALR 253 and (2009) 174 FCR 581. At first instance in that case, Allsop J decided that the total amount committed under the syndicate was deductible in the year of investment. On appeal, the Full Court limited the deduction to the amount paid.

After the Full Court decision in Malouf, the taxpayers accepted that they were not entitled to the extra deductions claimed, and that they had tax shortfalls for the 1999, 2000 and 2001 years. The taxpayers' evidence before the AAT was that they had relied on the advice of their tax agent in making their claims for deductions. No evidence was presented of any analysis undertaken by the tax agent of an entitlement to the deductions claimed.

Issues decided by the court or tribunal

The AAT found that the taxpayers had adopted a position on the deductions claimed that was reasonably arguable, based on the decision of Allsop J in Malouf (paragraph 8(i)).

The AAT noted that the Minister's Second Reading Speech to the Bill that introduced the former Part VII into the ITAA 1936 in 1992 indicated that the reasonably arguable position test in Part VII was a higher standard than the reasonable care standard (paragraph 17). It then found that, based on that view, if a taxpayer has adopted a reasonably arguable position, the taxpayer must be accepted as having taken reasonable care (paragraphs 18-19).

If the AAT was wrong in concluding that the taxpayers had taken reasonable care because they had adopted a reasonably arguable position on the deductions claimed, it concluded that, although the taxpayers had taken reasonable care because they had acted on advice from their tax agent, they had not discharged their burden because there was no evidence of the care that was taken by their tax agent.

Nevertheless, the AAT remitted the penalty in full on the basis that any level of penalty would be harsh because the taxpayers had adopted a position in their returns that was consistent with the decision of Allsop J in Malouf (paragraph 21).

ATO view of Decision

The ATO accepts that there was no error of law in the AAT's finding that the taxpayers had adopted a position on the deductions claimed that was reasonably arguable.

However, the ATO considers that the view of the AAT, that a taxpayer who has a reasonably arguable position on an income tax law, must be taken to have met the reasonable care standard, is inconsistent with both the key features of Part VII identified in the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992, and with the comments of Hill J in Walstern, at 138 FCR 25-27, and of Finn J in R & D Holdings [2006] FCA 981, at [182].

Those key features recognise that all taxpayers are required to exercise reasonable care in conducting their tax affairs, and that taxpayers with large claims are required, in addition, to ensure that the positions they adopt on the law are reasonably arguable. The ATO considers that the AAT erred in automatically assuming that a reasonably arguable position on the law means that a taxpayer and/or the taxpayer's tax agent has taken reasonable care. The AAT should have found that issues in relation to the taking of reasonable care need to be determined separately from issues about the adoption of a reasonably arguable position.

The Commissioner did not appeal these decisions to the Federal Court because there were no clear errors of law in the AAT's discretion to remit the 5% penalty to nil.

Administrative Treatment

Implications on current Public Rulings & Determinations

The ATO will continue to apply the principles in Miscellaneous Taxation Rulings MT 2008/1 and 2008/2 to the administration of Subdivision 284-B. Those Rulings recognise that issues relating to the taking of reasonable care are determined separately from those about whether a taxpayer has a reasonably arguable position.

Implications on Law Administration Practice Statements

None

Legislative References:
Income Tax Assessment Act 1936
226G
226K
227(3)

Taxation Administration Act 1953
284-75(2)
284-85
284-90
298-20

Case References:
Malouf v FCT
[2009] FCAFC 44
250 ALR 253
174 FCR 581
2009 ATC 20-099
75 ATR 335

Walstern v FCT
[2003] FCA 1428
54 ATR 423
2003 ATC 5076

Prebble v FCT
2002 ATC 5045
[2002] FCA 1434
51 ATR 459

R & D Holdings Pty Ltd v FCT
[2006] FCA 981
2006 ATC 4472
64 ATR 71

Dixon as trustee for the Dixon Holdsworth Superannuation Fund v FCT
[2008] FCAFC 54
167 FCR 287
2008 ATC 20-015
69 ATR 627

Re Hobart Central Child Care Pty Ltd and FCT
[2005] AATA 1027
60 ATR 1314
2005 ATC 2351