JCZC and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2009/1304-05)
Judgment date: 12 June 2012
Date published: 5 September 2012

Summary of decision:
Outlines the ATO's response to this case which concerned whether the taxpayer's position on a shortfall amount under the income tax law was not reasonably arguable, and whether that amount also resulted from recklessness by the taxpayer or its agent.

Overview of facts:
The taxpayer is the corporate trustee of the B Trust and, during the 1999 to 2003 income years, was a beneficiary of related trusts which were also beneficiaries of the M Trust. Mr X was the sole director and shareholder of the taxpayer and the trustee of the M Trust. | Mr X purchased a motor yacht in December 1998 on behalf of the M Trust which claimed income tax deductions of over $3m in the 1999 to 2003 years, for expenditure in relation to the yacht. The claims were disallowed, resulting in an assessment to the taxpayer for the 2003 year. The taxpayer did not dispute this assessment before the Tribunal. | That assessment gave rise to a shortfall amount and an assessement of penalty of 25% for applying a view of the law that was not reasonably arguable. A further assessment of penalty (50%) issued, based on recklessness of the taxpayer or its agent. | There was evidence before the Tribunal that Mr X acquired the yacht for the purpose of selling it for a profit and that he had entered into a sub-agency agreement to sell Dyna boats in Australia. An experienced agent was appointed to market the yacht. Although some attempts were made to sell it and to use it as a display boat, it was also used by Mr X for private purposes on some 15 occasions, including use as accommodation for him and his wife. | Before purchasing the yacht, Mr X sought advice from his tax agents as to whether the M Trust could claim income tax deductions for holding and running costs associated with the yacht. They advised that deductions would be allowable if private use of the yacht was kept to a minimum and if a sub-agency agreement to market Dyna boats was entered into which would allow him to sell to buyers outside South Australia. | Issues decided by the tribunal | At the beginning of the hearing in the Tribunal, the taxpayer's counsel effectively conceded that it did not have a reasonably arguable position on the law. In the light of evidence given during the hearing, counsel sought to withdraw that concession. The Tribunal refused to allow the concession to be withdrawn because it found that the evidence did not raise a serious doubt as to the correctness of the concession (paragraph 16). | The Tribunal found that the shortfall amount did not arise as a result of recklessness on the part of the taxpayer or of Mr X, as the guiding mind of both the M Trust and the B Trust. In claiming the relevant deductions on the basis that the taxpayer had the necessary profit-making purpose in relation to the yacht, Mr X relied on his tax agents for advice that the deductions were allowable. He was unaware that there was any real risk that the claims for deduction might not be allowable (paragraphs 43 to 48). | The Tribunal also found that the tax agents were not reckless. Based on the facts as they understood them, their advice about deductibility involved a reasonable professional judgement that could not be said to be grossly careless (paragraphs 49 and 50).

Issues decided:
At the beginning of the hearing in the Tribunal, the taxpayer's counsel effectively conceded that it did not have a reasonably arguable position on the law. In the light of evidence given during the hearing, counsel sought to withdraw that concession. The Tribunal refused to allow the concession to be withdrawn because it found that the evidence did not raise a serious doubt as to the correctness of the concession (paragraph 16). The Tribunal found that the shortfall amount did not arise as a result of recklessness on the part of the taxpayer or of Mr X, as the guiding mind of both the M Trust and the B Trust. In claiming the relevant deductions on the basis that the taxpayer had the necessary profit-making purpose in relation to the yacht, Mr X relied on his tax agents for advice that the deductions were allowable. He was unaware that there was any real risk that the claims for deduction might not be allowable (paragraphs 43 to 48). The Tribunal also found that the tax agents were not reckless. Based on the facts as they understood them, their advice about deductibility involved a reasonable professional judgement that could not be said to be grossly careless (paragraphs 49 and 50).

ATO view of decision:
The ATO accepts that it was reasonably open to the Tribunal, on the evidence before it, to find that neither Mr X, nor his tax agents, had acted recklessly in causing the trustee of the M Trust to claim the relevant deductions in relation to the yacht.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | None | Implications for Law Administration Practice Statements | None

Legislative references: Taxation Administration Act 1953 14ZZK 284-15 284-30 284-75 284-80 284-90
Case references: BRK (Bris) Pty Ltd v FCT [2001] FCA 164 2001 ATC 4111 46 ATR 347 Drake and Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 46 FLR 409 24 ALR 577 Forrest v FCT (2010) 78 ATR 417 [2010] FCAFC 6 2010 ATC 20-163 78 ATR 417 Hart and FCT [2003] FCAFC 105 131 FCR 203 2003 ATC 4665 53 ATR 371 Re Marks and Secretary, Department of Defence (1987) 11 ALD 456 Re Martin and Clth of Australia (1983) 5 ALD 277 Sent and Commissioner of Taxation [2012] FCA 382 2012 ATC 20-318 Tuite and AAT [1993] FCA 71 (1993) 40 FCR 483
Subject references: Administrative penalty False or misleading statement Reasonably arguable position Recklessness by taxpayer or tax agent