Tribunal affirms 75% penalty and 20% uplift where taxpayer failed to report sales of residential apartments

In Subloo’s Investments Pty Ltd and Commissioner of Taxation [2012] AATA 703 the Tribunal affirmed the Commissioner’s decision to impose penalties of 75% plus an uplift of 20% because of the repetition of the conduct of the taxpayer in failing to report the sales of residential apartments.  In this case, the penalties almost equated to the GST shortfall.

For the first three tax periods in question, the applicant lodged activity statements claiming input tax credits but failed to record the sale of apartments during those periods, resulting in refunds being paid to the applicant.  For the remaining tax periods, the applicant failed to record any of the sales made. An audit by the ATO showed a GST shortfall of $534,018 and a shortfall penalty of $460,447.95 was made.  This was based on a base penalty of 75% (intentional disregard) and, except for the first month, the base penalty be increased by 20% because of the repetition of the conduct.

The applicant did not contest the GST shortfall, nor the characterisation of its conduct as intentional disregard.  The only issue was whether the penalties should be remitted.  The essential argument appeared to be that the applicant’s financier, without their consent, applied the GST component of the sales to reduce the mortgage debt rather than paying the GST and the project then got into financial difficulties.  The Tribunal found no basis for remission, essentially because the applicants chose not to account for GST for 18 months and chose not to contact the Commissioner to explain such difficulties that they may have been experiencing.

Tribunal decision on GST and penalties

Yesterday the Tribunal handed down its decision in Hirezi and Ors and Commissioner of Taxation [2012] AATA 688 where it affirmed the Commissioner’s decision to impose penalties in respect of the applicant’s GST shortfall.  The applicant unsuccessfully contended that he was blameless in the management of his affairs and that he was a victim of his tax agent who was incompetent.

The applicant was a member of a partnership which developed an industrial estate for sale.  The partnership did not correctly account for GST on the lots sold and there was no dispute that there was a GST shortfall.  The Commissioner imposed penalties at 50% (on the basis of reckless conduct) but remitted that penalty to 25% because of the applicant’s good compliance record.  The applicant contended that the penalty should have been imposed at a lower rate and also remitted further.

The Tribunal found that the applicant’s argument on the imposition of the penalty could not succeed.  There was clearly a basis for a finding of reckless conduct by the tax agent.

The Tribunal also found that the penalties should not be remitted further. The applicant argued as follows:

  • the applicant was essentially blameless for what occurred and it would be harsh to make them responsible for the consequences of their tax agent’s failings; and
  • even if the Commissioner was not inclined to provide relief for taxpayers from the sins of their agents in the ordinary course, it would be harsh to take that approach in this case because the agent was uninsured and had few assets to satisfy a judgment.

The Tribunal accepted that the applicant was not aware of any of the mismanagement by his tax agent and was not being wilfully blind to what was going on.  However, the Tribunal was not satisfied that the applicant was blameless – this is because he signed whatever was put in front of him without asking some basic questions about what he was signing.  Accordingly, the applicant did contribute, albeit in a small way, to his own misfortune.

Interestingly, the Tribunal found that remittal of penalty might be considered where it served no purpose to visit a penalty on the taxpayer – referring to a recent decision of the Tribunal in Johnson and Commissioner of Taxation [2011] AATA 20. The Commissioner did not concede that it was generally appropriate to remit a penalty where the taxpayer is blameless in the face of an incompetent tax agent. Those considerations did not apply here as the applicant did contribute to events and there would be a purpose in the penalty as it would reflect the applicant’s failure to be more diligent in his dealings with his tax agent.

Commissioner issues PSLA on penalties; Addendum to MT 2006/1 re Enterprise.

On 23 August 2012 the Commissioner published PSLA 2012/5 ‘Administration of penalties for making false or misleading statements that result in shortfall amounts.  This replaces PSLA 2006/2 effective 23 August 2012 and it explains how the Commissioner administers the penalty for making a false or misleading statement made on or after 1 April 2004 where the statement results in a shortfall amount.  The PSLA discusses when such a statement will give rise to the administrative penalty and how the penalty is assessed, including any remission of the penalty.  This covers all taxes, including GST.

On 22 August 2012 the Commissioner published Addendum MT2006/1A1 to MT 2006/1 ‘The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number’.  The Addendum updates references to legislation and cases, in particular the decision of the Federal Court in FCT v Swansea Services Pty Ltd [2009] FCA 402.  In doing so, the Ruling incorporates the following aspects from that decision:

  • The words ‘in the form of’ do not support a suggestion that form alone may prevail over substance.  However, those words ‘have the effect of extending the reach of ‘enterprise’ to those activities which are in the form of a business but would not, in the ordinary meaning of ‘business’ be considered such.  But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby’: paragraph 170A
  • Whether the passive nature of an activity affects the characterisation (of carrying on a business) will turn on the particular context: footnote 68
  • The GST legislation does not preclude investment activities from amounting to the carrying on of an enterprise: footnote 70