Decision impact statement
Mezrani and Commissioner of Taxation
Venue: Administrative Appeals Tribunal
Venue Reference No: 2008/2748, 2008/2751 & 2008/2752
Judge Name: DP Tamberlin
Judgment date: 1 September 2009
Appeals on foot:
No.
Impacted Advice
Relevant Rulings/Determinations:- N/A
Subject References:
Income tax
Penalties
Tax shortfall
Negligence
Reasonable care
Recklessness
Précis
Outlines the Tax Office response to this case, which concerned whether the failure to include profits from the sale of property owned by the Applicants in their income tax returns was a result of recklessness by them or their tax agent, and whether the penalty was correctly applied.
Decision Outcome:
Partly Adverse
Brief summary of facts
1. In 2002, the Applicants, with a group of family members, purchased properties for the purpose of constructing residential units ('the project').
2. The project was undertaken during the 2002 and 2003 years.
3. The Applicants' accountant for these transactions was Mr Moses who was a close personal friend. There was also a project accountant.
4. After completion of the project (which comprised of 10 two bedroom units) the units were divided between the participants. On this basis, Mr Mezrani became the registered owner of units 1 and 3 and Mrs Mezrani became the registered owner of units 2 and 4.
5. The Applicants intended to retain the units as long term investments; however, subsequently the bank required the Applicants to sell the units to reduce their overall level of mortgage.
6. Units 1 and 2 were sold on or about 30 June 2004 and units 3 and 4 were sold in December 2004 and September 2004, respectively.
7. As a result of the death of Mr Moses in October 2004, the Applicants' nephew, Sammy Mezrani ('Sammy'), took over the responsibility of the Applicants' financial affairs. Sammy lived with the Applicants at one point helping to look after their children. Sammy and the Applicants were very close.
8. In May 2006, Sammy passed away.
9. Mr Mezrani took Sammy's death very hard and on his evidence was devastated and rarely left the house. This condition prevailed for seven to eight months. As a result of the combination of the deaths of Mr Moses and Sammy, the recording of the Applicants' finances was inadequate.
10. Mrs Mezrani stated that she relied on Mr Mezrani for their financial affairs. After prompting by the Tax Office to file the 2004 and 2005 income tax returns, Mr Mezrani engaged new tax agents - Gateway Partners. These agents had purchased the accounting practice of Mr Moses.
11. In his haste of compiling the returns and the combination of the deaths of Mr Moses and Sammy, Mr Mezrani did not recall the sales of the properties for inclusion in the income tax returns for himself and his wife. In addition, he did not notify his accountants of the sales.
12. The Commissioner imposed a penalty in relation to recklessness for both of the Applicants. The bases relied on were that as company directors with experience in the business of property developments in the past, they were aware that sales of property at a profit resulted in taxation consequences which needed to be reported to the Tax Office. They also received a letter from the project accountants for the joint venture dated 20 March 2006 which should have sounded a warning to them to include the capital gains in their relevant taxation returns.
13. The Applicants accepted that they acted negligently and agreed that a penalty of 25% of the shortfall amount was appropriate but denied that their behaviour was reckless.
Issues decided by the court or tribunal
1. Whether Mr Mezrani is liable to an administrative penalty for recklessness under sections 284-75(1) and 284-90(1), Item 2 of Schedule 1 of the TAA, for the income years ended 30 June 2004 and 30 June 2005?
2. Whether Mrs Mezrani is liable to an administrative penalty for recklessness under sections 284-75(1) and 284-90(1), Item 2 of Schedule 1 of the TAA, for the income year ended 30 June 2005?
3. Should all or a part of the penalty imposed on the Applicants be remitted under section 298-20(1) of Schedule 1 to the TAA 1953?
Answers to the issues
1. No. The Applicant is liable to an administrative penalty for lack of reasonable care.
2. No. The Applicant is liable to an administrative penalty for lack of reasonable care.
3. No.
Tax Office view of Decision
The decision of the Tribunal was open to it on the facts of the case. The Tribunal accepted that Mr Mezrani was in charge of the financial affairs of both Applicants.
The Tribunal gave consideration to the effect that the deaths of Mr Moses and Sammy had on the Applicants during the period the tax returns were being compiled. In relation to the death of Sammy, it was only at the hearing that evidence was led from Mr Mezrani as to the effect of the death of his nephew.
The Tribunal acknowledged the Applicants' record keeping was unsatisfactory. However, the Tribunal found the Applicants overall conduct amounted to negligence rather than satisfying the threshold required to make a finding of recklessness.
Administrative Treatment
Implications on current Public Rulings & Determinations
None.
Implications on Law Administration Practice Statements
None
Court citation:
[2009] AATA 654
2009 ATC 10-103
76 ATR 959
Legislative References:
Taxation Administration Act (TAA)
14ZZK
284-75
284-90
298-20
Case References:
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation
[2001] FCA 164
2001 ATC 4111
(2001) 46 ATR 347
Hart v Commissioner of Taxation
(2003) 131 FCR 203
2003 ATC 4665
53 ATR 371
Re Ajami and Commissioner of Taxation
[2007] AATA 1231
2007 ATC 2143
(2007) 65 ATR 957
Re Jones and Commissioner of Taxation
[2003] AATA 84
2003 ATC 2024
(2003) 52 ATR 1063