Case: Hart v Commissioner of Taxation (2003) 131 FCR 203
Outcome: followed
the two immediately lesser base penalty percentages, the definitive way of conceiving their differentiation and application is that offered, again in respect of materially analogous predecessor provisions in the ITAA 1936, by the majority in Hart v Commissioner of Taxation (2003) 131 FCR 203 at 214: [43] Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective. In BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164 ; (2001) 46 ATR 347 at 364 Cooper J made the following observations in relation to recklessness in the context of s 226H: "Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness." [44] There is a line between recklessness and dishonesty, and as the Explanatory Memorandum for the Taxation Laws Amendment (Self Assessment Bill 1992 (Cth) (at p 98) confirms, a finding of dishonesty is not necessary for a taxpayer to be subject to a s 226H penalty. Wherever a tax return includes deductions that are not allowable, a foreseeable consequence is that there will be a tax shortfall, particularly in a system of self assessment. But, in the ordinary case, the mere fact that a tax return includes a deduction which is not allowable is not of itself sufficient to expose the taxpayer to a penalty. Negligence, at least must be established although there are some sections (eg s 226K) which impose a liability in particular circumstances even if the taxpayer has not been negligent. The context makes it clear that recklessness means something more than failure to exercise reasonable care (s 226G), but less than an intentional disregard of the Act (s 226J). On the characterisation of events which I prefer, Mr Russell has not exhibited disregard of, or indifference to, consequences reasonably foreseeable by a reasonable person. I do not consider that he has been "reckless". Has he, nonetheless, failed to take reasonable care to comply with the ITAA 1997, in particular, Part 2-42, such that a tax shortfall has resulted in each income year? Mr Russell seems to me to have operated on the assumption, notwithstanding his professed ignorance at the time of Australian income tax law, that his and Ancath's positions under Australian income tax law were, for all practical purposes, the same as those which prevailed under the New Zealand income tax law with which he had at least passing familiarity. He had this to say in cross examination about the nature and extent of his knowledge of the two countries' taxation regimes: HIS HONOUR: You didn't seek to explore whether your New Zealand qualifications might translate into Australian registration?---For accounting to Australia, I was aware that there were extra examinations that would have to be done, and I just wasn't interested. Whilst some of the tax law is very similar to New Zealand, there are lots of areas that are totally different, and, in fact, so different that there isn't a comparable in New Zealand. And I was just my days of study are long gone, and I just wasn't interested. I took this to be indicative of Mr Russell's position throughout the income years in question and when he came to prepare his returns for those years. The adoption of Ancath as the entity via which Tradecorp would come to have the benefit of his services exhibited a degree of sophistication on both Mr Russell's and Mr Zarb's parts. He was not to be just one of Tradecorp's wage and salary earners. Yet he must have known, or at least he has not disproved, that he knew that he and only he was to perform all of the work for which Tradecorp was to pay money. Had he undertaken that work as an employee of Tradecorp there could have been no question that he would thereby be personally liable to Australian income tax as a wage and salary earner. Yet, notwithstanding the degree of sophistication in the arrangement and his realisation that there were "lots of areas" in which Australian taxation law was "totally different" to that of New Zealand and his own lack of interest in studying Australian taxation law, he chose not to seek any advice at all about what might be the Australian taxation law consequences of the adoption of the arrangement whereby Ancath came to be interposed. That to me in the circumstances was a failure to take reasonable care to comply with the ITAA 1997. In each income year that failure resulted in a false statement being made by Mr Russell as to his assessable income and, in turn, to a tax shortfall. Having regard to item 3 of the table in s 284-90(1) of schedule 1 to the TAA, he is liable under s 284-75 to pay an administrative penalty of 25% of his shortfall amount for these income years.