Case: Walstern Pty Ltd v Commissioner of Taxation [2003] FCA 1428 ; (2003) 138 FCR 1
Outcome: applied
In Walstern Pty Ltd v Commissioner of Taxation [2003] FCA 1428 ; (2003) 138 FCR 1 at [77] , Hill J after referring to W Nevill &amp; Co Ltd v Federal Commissioner of Taxation [1937] HCA 9 ; (1937) 56 CLR 290, said that: " ... it cannot be said that the question whether a payment is a one-off payment or whether it is a recurrent payment is a matter irrelevant to whether the outgoing is capital. In a case such as the present where the payment operates to create the capital of a trust fund the outlay will ordinarily be seen as capital both because of the lasting qualities enjoyed and the fact that what is being made is a final payment to secure future benefits. However, if a contribution is one of a number of 'recurrent' contributions for employees, so that it can be seen to be part of the ordinary flow of business expenditure of a taxpayer, the character of the outlay will take on a different complexion. It is important to bear in mind that the evidence of Mr Medich was that he and his brother wanted to draw money out of Walstern and establish a fund for investment and that it was decided to do so by contributing two amounts of $1 million. This evidence is highly significant in determining whether the contributions were recurrent or really represented a once and for all contribution of $2 million to set up a fund although made in two annual instalments each of $1 million." 158 Even if contrary to the views I have earlier expressed, Part IVA applies, a penalty may only be imposed at a rate of 50% if Star City's position was not reasonably arguable. Whether or not a position is reasonably arguable was explained by Hill J in Walstern Pty Ltd v Commissioner of Taxation [2003] FCA 1428 ; (2003) 138 FCR 1 at [108] in the context of s 226K in the following terms: "Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of 'authority' a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen to be wrong it is nevertheless 'about' as likely to be correct as the correct view. A question of judgment is involved." 159 In the present case, the Commissioner sought to impose penalties at 50% under s 226L of the 1936 Act . Section 226L provided: "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 taxpayer in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; and (c) the scheme was a tax avoidance scheme within the meaning of section 224(1); and (d) none of the scheme sections applies in relation to the scheme; the taxpayer is liable to pay, by way of penalty, additional tax equal to: (e) if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct 25% of the amount of the shortfall or part; or (f) in any other case 50% of the amount of shortfall or part." 160 Three issues are significant: first, the intended operation of s 226L by reference to the definition of "scheme sections" in s 226L(d); secondly, the definition of "tax avoidance scheme" in s 226L(c) and, finally, whether Star City's position was "reasonably arguable" for the purposes of s 226L(e).