Commissioner of Taxation v Paul Andrew Burness & Anor (As Trustee for the Property of Robert Bottazzi, A Bankrupt)
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 905 of 2008)
Judgment date: 14 September 2009
Date published: 5 March 2010

Summary of decision:
Outlines the ATO response to this case which concerned whether the Administrative Appeals Tribunal (AAT) erred in exercising its discretion under subsection 227(3) of the Income Tax Assessment Act 1936 (ITAA 1936) to remit a tax shortfall penalty. | Decisions Outcome | Commissioner's appeal dismissed

Overview of facts:
Before the AAT [2008] AATA 890, the taxpayer argued that the capital gain on a sale of property was not assessable to him because he held the property on trust for a friend. In the alternative, he also argued that the cost base of the property should be increased to recognise improvements, and that the purchase of the property from his friend was not a dealing at arm's length, such that the cost base should be the higher market value of the property at the time that he became the registered owner. | The AAT was not satisfied that the taxpayer had discharged his burden of proving that the capital gain on the sale was not properly assessable to him. The AAT also accepted that there was an avoidance of tax due to evasion for the purposes of paragraph 170(2)(a) of the ITAA 1936, and that tax shortfall penalty was correctly imposed at 75% under section 226J of the ITAA 1936 because the shortfall was caused by the intentional disregard by the taxpayer of the law. However, the AAT then chose to exercise the discretion under subsection 227(3) of the ITAA 1936 to remit the tax shortfall penalty to 25%. | The Commissioner appealed to the Federal Court on the basis that the AAT had erred in law in taking into account five irrelevant considerations in deciding to remit the penalty, being four factors related to the conduct of the AAT hearing (findings were made against the taxpayer primarily due to his failure to discharge the burden of proof; the taxpayer was not legally represented at the hearing; the purchase price of the property was possibly less than its true market value: and the sale of the property occurred 10 years ago), and that the taxpayer was also liable for the general interest charge (GIC) liability over which the AAT had no jurisdiction. | At the time of the hearing of the appeal, the taxpayer was a bankrupt and his trustees were substituted as respondents. The trustees argued that the first three matters (failure to discharge the burden of proof, taxpayer unrepresented at the hearing and acquisition cost possibly less than true market value) were relevant to the exercise of the discretion and that the other two matters were not part of the AAT's remission decision. | Issues decided by the court | Gordon J rejected the Commissioner's argument that any of the five matters identified was an irrelevant consideration taken into account by the AAT in exercising its discretion to remit the tax shortfall penalty payable. Her Honour held that the discretion to remit is expressly unconfined, and it is relevant for the AAT to consider the particular circumstances of the taxpayer to determine if there would be a harsh outcome if the penalty were not remitted - a task that the AAT properly undertook (paragraphs 25 to 27). | Having regard to the subject matter, scope and purpose of the ITAA 1936, none of the first three considerations was extraneous to the power to remit (paragraph 28). In particular, her Honour found that: • the failure to discharge the onus of proof is not extraneous to the power to remit because the 'particular circumstances of the taxpayer' refer to the conduct of the taxpayer at all stages, including the conduct of his appeal before the AAT (paragraph 31); • the fact that the taxpayer was unrepresented before the AAT is not extraneous because it relates to the onus of proof and the ability of the taxpayer, for example, to show whether the amount of the capital gain should have been less because the cost base should have been higher (paragraphs 34 and 35); and • the possible non arm's length dealing is related to the first two considerations, and the AAT was able to assess that the taxpayer's conduct was not as culpable as might otherwise have been inferred had he been represented (paragraph 38). | • the failure to discharge the onus of proof is not extraneous to the power to remit because the 'particular circumstances of the taxpayer' refer to the conduct of the taxpayer at all stages, including the conduct of his appeal before the AAT (paragraph 31); • the fact that the taxpayer was unrepresented before the AAT is not extraneous because it relates to the onus of proof and the ability of the taxpayer, for example, to show whether the amount of the capital gain should have been less because the cost base should have been higher (paragraphs 34 and 35); and • the possible non arm's length dealing is related to the first two considerations, and the AAT was able to assess that the taxpayer's conduct was not as culpable as might otherwise have been inferred had he been represented (paragraph 38). | Her Honour found that the fact that the sale of the property occurred 10 years ago was not taken into account by the AAT in deciding to remit. However, even if this matter was taken into account by the AAT, it was relevant to the particular circumstances of the taxpayer because it related to the power of the Commissioner to amend the taxpayer's assessment under section 170 based on a finding of an avoidance of tax due to evasion (paragraphs 44 and 45). | Finally, her Honour found that the AAT's reference to GIC was a mere afterthought and was not a finding that another provision of the taxation law imposed a further liability on the taxpayer. If the reference to GIC had have been part of the AAT's decision, it would have been irrelevant, based on the Full Court's decision in Dixon , and would have warranted the setting aside of the decision (paragraphs 50-53).

Issues decided:
Gordon J rejected the Commissioner's argument that any of the five matters identified was an irrelevant consideration taken into account by the AAT in exercising its discretion to remit the tax shortfall penalty payable. Her Honour held that the discretion to remit is expressly unconfined, and it is relevant for the AAT to consider the particular circumstances of the taxpayer to determine if there would be a harsh outcome if the penalty were not remitted - a task that the AAT properly undertook (paragraphs 25 to 27). Having regard to the subject matter, scope and purpose of the ITAA 1936, none of the first three considerations was extraneous to the power to remit (paragraph 28). In particular, her Honour found that: • the failure to discharge the onus of proof is not extraneous to the power to remit because the 'particular circumstances of the taxpayer' refer to the conduct of the taxpayer at all stages, including the conduct of his appeal before the AAT (paragraph 31); • the fact that the taxpayer was unrepresented before the AAT is not extraneous because it relates to the onus of proof and the ability of the taxpayer, for example, to show whether the amount of the capital gain should have been less because the cost base should have been higher (paragraphs 34 and 35); and • the possible non arm's length dealing is related to the first two considerations, and the AAT was able to assess that the taxpayer's conduct was not as culpable as might otherwise have been inferred had he been represented (paragraph 38). • the failure to discharge the onus of proof is not extraneous to the power to remit because the 'particular circumstances of the taxpayer' refer to the conduct of the taxpayer at all stages, including the conduct of his appeal before the AAT (paragraph 31); • the fact that the taxpayer was unrepresented before the AAT is not extraneous because it relates to the onus of proof and the ability of the taxpayer, for example, to show whether the amount of the capital gain should have been less because the cost base should have been higher (paragraphs 34 and 35); and • the possible non arm's length dealing is related to the first two considerations, and the AAT was able to assess that the taxpayer's conduct was not as culpable as might otherwise have been inferred had he been represented (paragraph 38). Her Honour found that the fact that the sale of the property occurred 10 years ago was not taken into account by the AAT in deciding to remit. However, even if this matter was taken into account by the AAT, it was relevant to the particular circumstances of the taxpayer because it related to the power of the Commissioner to amend the taxpayer's assessment under section 170 based on a finding of an avoidance of tax due to evasion (paragraphs 44 and 45). Finally, her Honour found that the AAT's reference to GIC was a mere afterthought and was not a finding that another provision of the taxation law imposed a further liability on the taxpayer. If the reference to GIC had have been part of the AAT's decision, it would have been irrelevant, based on the Full Court's decision in Dixon , and would have warranted the setting aside of the decision (paragraphs 50-53).

ATO view of decision:
The Court applied the principles set out in Elias and Dixon to find that the AAT had not taken irrelevant considerations into account in exercising the discretion to remit shortfall penalty imposed. Those principles are consistent with the ATO view on how the exercise of the remission discretion is currently administered.

Administrative treatment:
Implications on current Public Rulings & Determinations | None

Legislative references: Income Tax Assessment Act 1936 Part VII 226J 227(3) 170 170AA Taxation Administration Act 1953 Div 1 of Part IIA 14ZZK Administrative Appeals Tribunal Act 1975 44(1)
Case references: Minister for Aboriginal Affairs v Peko-Wallsend Ltd 162 CLR 24 [1986] HCA 40 Dixon v FCT 167 FCR 287 2008 ATC 20-015 69 ATR 627 BHP Billiton Direct Reduced Iron Pty Ltd v DFC of T [2007] FCA 1528 2007 ATC 5071 67 ATR 578 Elias v Commissioner of Taxation 123 FCR 499 2002 ATC 4579 50 ATR 253 Nyack Investments Pty Ltd v FCT [2005] AATA 468 2005 ATC 2173 59 ATR 1116
Subject references: Remission of administrative penalty