Queensland Harvesters Pty Ltd and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2008/11, 2780)
Judgment date: 15 May 2009
Date published: 17 September 2009

Summary of decision:
Whether the discretion to treat a document as a tax invoice should be exercised, whether tax shortfall resulted from intentional disregard or recklessness, whether penalty for failure to withhold should be further remitted, whether AAT bound to accept an incorrect concession by the Commissioner, and whether residual discretions should be exercised.

Overview of facts:
1. During the year ended 30 June 2005 the applicant carried on the business of supplier of labour to primary producers. | 2. Mr Brett Lu was the sole director of the applicant and was responsible for the applicant's day to day operations. Mr Lu's father, Mr Ty Lu, was an employee of the applicant. | 3. Mr Ty Lu looked after the applicant's activities in Bowen in North Queensland. Subcontractor would hand their invoices to Mr Ty Lu who would then telephone the details to Mr Brett Lu, who would write out a cash cheque for the invoiced amount, record the amount and the contractor's name on the cheque butt and forward the cheque to Mr Ty Lu by mail. Mr Ty Lu would then give the cheque to the subcontractor. | 4. Mr Ty Lu would then mail the subcontractor's invoice to Mr Brett Lu who paid no heed to them at that time. However, when it was time to prepare the applicant's activity statement (BAS), Mr Lu entered information from the cheque butts and invoices into the applicant's computer system. The applicant's tax agent used this information to prepare the BAS. | 5. In May 2005, the Commissioner's staff undertook an inspection of the applicant's records to validate invoices and to assess record keeping practices for the quarterly tax period 1 October 2004 to 31 December 2004. Deficiencies in the invoicing were pointed out. | 6. On 19 May 2005, the Commissioner forwarded a letter advising he did not intend to revise the BAS, but may re-open enquiries in the future. | 7. In June 2006, a more detailed audit for GST compliance was undertaken covering all four quarters of the 2004/05 financial year. | 8. The Commissioner concluded: • The applicant claimed input tax credits totalling $18,283 to which it was not entitled because the applicant did not hold valid tax invoices in respect of those claims; • false and misleading statements were made and an administrative penalty of 75% of the tax shortfall was payable on the basis that the shortfall resulted from intentional disregard of the tax law. • no part of the shortfall penalty would be remitted; • that there was a failure to withhold tax at a rate of 48.5% from payments to suppliers that had not quoted an ABN and therefore an administrative penalty equal to that amount was payable; and • 25% of that administrative penalty would be remitted. | • The applicant claimed input tax credits totalling $18,283 to which it was not entitled because the applicant did not hold valid tax invoices in respect of those claims; • false and misleading statements were made and an administrative penalty of 75% of the tax shortfall was payable on the basis that the shortfall resulted from intentional disregard of the tax law. • no part of the shortfall penalty would be remitted; • that there was a failure to withhold tax at a rate of 48.5% from payments to suppliers that had not quoted an ABN and therefore an administrative penalty equal to that amount was payable; and • 25% of that administrative penalty would be remitted. | 9. Assessments reflecting these conclusions were issued and the applicant objected against the assessments. | 10. The Commissioner allowed the objections to the extent of accepting that withholding was not required for some payments to suppliers, but otherwise disallowed the objections. | 11. The applicant applied to the Administrative Appeals Tribunal (AAT) for review of the objection decisions. | 12. The Commissioner subsequently issued amended assessments of net amount for the four quarterly tax periods. The overall liability reflected in the assessments remained the same, but adjustments were made to the assessments of the GST net amount for each tax period. | 13. The applicant objected against the amended assessments, the objections were disallowed and the applicant also applied to the AAT for review of these objection decisions. | Issues decided by the court or tribunal | 1. Whether the Commissioner should exercise the discretion under subsection 29-70(1) of the A New Tax System (Goods and Services) Act 1999 to treat as a tax invoice a document that is not a tax invoice? | The Tribunal found that Mr Brett Lu, as the controlling mind of the applicant had not exercised reasonable care in circumstances where even the most perfunctory scrutiny of the invoices would have demonstrated the flaws in them. The fact that none of the 36 invoices satisfied the requirements of the legislation suggested that Mr Brett Lu took no care at all. It followed that the applicant was not entitled to the input tax credits that it had claimed in the 2004-05 year. | 2. Whether the administrative penalty pursuant to Division 284 of Schedule 1 to the TAA was correctly assessed? | Although the Commissioner had initially determined during the assessment process that there had been intentional disregard on the part of the applicant, the Commissioner submitted to the Tribunal that the shortfall should be regarded as having resulted from recklessness. The Tribunal agreed and set aside that part of the objection decision that disallowed the objection to the assessment of a 75% administrative penalty and remitted the matter to the Commissioner to determine the penalty on the basis that the shortfall resulted from recklessness. | 3. Whether this penalty should be reduced by 20% pursuant to section 284-225 of Schedule 1 to the Taxation Administration Act 1953 (TAA) because of a voluntary disclosure? | The Tribunal did not consider that what was done amounted to telling the Commissioner about the shortfall; nor was the Tribunal satisfied that what was done saved the Commissioner a significant amount of time or resources. Accordingly, the Tribunal concluded that s 284-225(1)(c) was not satisfied and there was no basis for any reduction of the base penalty amount. . | 4. Whether the taxpayer was required to withhold an amount paid to the entities where there was no ABN provided or did one of the exceptions in section 12-190 of Schedule 1 to the TAA applies? | The Tribunal found that the applicant was required to withhold amounts from payments made to suppliers in relation to invoices that did not include the ABN of the suppliers. The Tribunal then went on to consider whether the Commissioner's decision on objection to accept that the exception in s 12-190(3) applied to some of the invoices was correct. The Tribunal concluded that the Commissioner's decision was wrong, and decided to substitute a decision that that part of the applicant's objection be disallowed. This has the effect of increasing the administrative penalty in respect of the failure by the applicant to withhold amounts from payments to the relevant suppliers. | In coming to this conclusion, the Tribunal held that it is not bound to accept concessions made by the parties, but has an overriding duty to consider the evidence so as to come to the correct or preferable decision. | 5. Whether the penalty for failure to withhold should be further remitted by virtue of section 16-30 in Schedule 1 to the TAA? | The Tribunal decided that no further remission of penalty for failure to withhold amounts is warranted. Mr Brett Lu had earlier experience with the requirements of the legislation when his affairs were the subject of an audit in respect of an earlier income year, but, despite his earlier experiences, he was recklessly indifferent to the requirements of the GST legislation. . | 6. Whether the Commissioner has taken into account all relevant factors in determining not to remit all or part of the administrative penalty amount under section 298-20 of Schedule 1 to the TAA? | The Tribunal decided that, particularly having regard to the Commissioner's concession that reduced the shortfall penalty from 75% to 50%, no further remission of penalty is warranted..

Issues decided:
1. Whether the Commissioner should exercise the discretion under subsection 29-70(1) of the A New Tax System (Goods and Services) Act 1999 to treat as a tax invoice a document that is not a tax invoice? The Tribunal found that Mr Brett Lu, as the controlling mind of the applicant had not exercised reasonable care in circumstances where even the most perfunctory scrutiny of the invoices would have demonstrated the flaws in them. The fact that none of the 36 invoices satisfied the requirements of the legislation suggested that Mr Brett Lu took no care at all. It followed that the applicant was not entitled to the input tax credits that it had claimed in the 2004-05 year. 2. Whether the administrative penalty pursuant to Division 284 of Schedule 1 to the TAA was correctly assessed? Although the Commissioner had initially determined during the assessment process that there had been intentional disregard on the part of the applicant, the Commissioner submitted to the Tribunal that the shortfall should be regarded as having resulted from recklessness. The Tribunal agreed and set aside that part of the objection decision that disallowed the objection to the assessment of a 75% administrative penalty and remitted the matter to the Commissioner to determine the penalty on the basis that the shortfall resulted from recklessness. 3. Whether this penalty should be reduced by 20% pursuant to section 284-225 of Schedule 1 to the Taxation Administration Act 1953 (TAA) because of a voluntary disclosure? The Tribunal did not consider that what was done amounted to telling the Commissioner about the shortfall; nor was the Tribunal satisfied that what was done saved the Commissioner a significant amount of time or resources. Accordingly, the Tribunal concluded that s 284-225(1)(c) was not satisfied and there was no basis for any reduction of the base penalty amount. . 4. Whether the taxpayer was required to withhold an amount paid to the entities where there was no ABN provided or did one of the exceptions in section 12-190 of Schedule 1 to the TAA applies? The Tribunal found that the applicant was required to withhold amounts from payments made to suppliers in relation to invoices that did not include the ABN of the suppliers. The Tribunal then went on to consider whether the Commissioner's decision on objection to accept that the exception in s 12-190(3) applied to some of the invoices was correct. The Tribunal concluded that the Commissioner's decision was wrong, and decided to substitute a decision that that part of the applicant's objection be disallowed. This has the effect of increasing the administrative penalty in respect of the failure by the applicant to withhold amounts from payments to the relevant suppliers. In coming to this conclusion, the Tribunal held that it is not bound to accept concessions made by the parties, but has an overriding duty to consider the evidence so as to come to the correct or preferable decision. 5. Whether the penalty for failure to withhold should be further remitted by virtue of section 16-30 in Schedule 1 to the TAA? The Tribunal decided that no further remission of penalty for failure to withhold amounts is warranted. Mr Brett Lu had earlier experience with the requirements of the legislation when his affairs were the subject of an audit in respect of an earlier income year, but, despite his earlier experiences, he was recklessly indifferent to the requirements of the GST legislation. . 6. Whether the Commissioner has taken into account all relevant factors in determining not to remit all or part of the administrative penalty amount under section 298-20 of Schedule 1 to the TAA? The Tribunal decided that, particularly having regard to the Commissioner's concession that reduced the shortfall penalty from 75% to 50%, no further remission of penalty is warranted..

ATO view of decision:
Other than in respect of the first matter referred to below, the Tribunal's decision accords with the submissions made by the Commissioner. | Correcting an error by the Commissioner in favour of the applicant | The Commissioner accepted that there had been a misapplication of the law in deciding on objection that the exception in s 12-190(3) of Schedule 1 to the TAA applied to some of the tax invoices held by the applicant. However, in its submission to the Tribunal, the Commissioner did not ask the Tribunal to determine this aspect of the matter, which was not in dispute between the parties, on the basis that the applicant did not mislead the Commissioner, the error was a misapplication of the law made by the Commissioner, the error was in the applicant's favour, and the misapplication of the law was limited to the penalty for failure to withhold only. | Nevertheless, the Tribunal considered that it was duty bound to reach the correct decision and therefore substituted a decision disallowing that part of the objection and remitted the matter to the Commissioner to give effect to that decision. | The Tax Office accepts that the decision of the Tribunal accords with its duty in conducting a merits review and notes that the Commissioner is required to give effect to decisions of the Tribunal in accordance with s 14ZZL(1) of the TAA. | Issuing amended assessments after application is made for review of objection decisions | Referring to the Commissioner's decision to issue amended assessments after the applicant had applied for review of the objection decisions relating to the original assessments, the Tribunal made the following observation at paragraph 20 of its reasons: | It seems likely that the Commissioner made these amendments without regard to the terms of s 26 of the Administrative Appeals Tribunal Act 1975 (Cth). In the course of the hearing, and with the agreement of the parties, I gave consent nunc pro tunc to alter the original decisions in the way reflected by the amended assessments in order to overcome any procedural irregularity. | Section 26 of the AAT Act provides that, after an application for review of a decision by the Tribunal is made, the decision may not be altered other than by the Tribunal on review. There is an exception where the parties and the Tribunal consent to the making of the alteration. | This issue was not the subject of detailed submissions to the Tribunal. It is noted that the decision before the Tribunal is an objection decision and that, in Fabry v Federal Commissioner of Taxation 2003 ATC 4885, Merkel J stated at paragraph 39, in an income tax context, that: ' In my view there is no basis for implying a legislative intention that s 26 of the AAT Act is to repeal, alter or derogate from the power of amendment of the Commissioner under s 170(1) of the ITA Act . The legislature has turned its mind to limiting the Commissioner's powers in respect of amended assessments and has done so expressly by reference to time limitations .' | Accordingly, the Commissioner considers that, despite the comments of the Tribunal in this matter, he may amend an assessment of net amount at any time, in accordance with the express power in section 105-25 of Schedule 1 to the TAA. | Discretion to treat a document as a tax invoice | In deciding whether the discretion to treat the invalid tax invoices as tax invoices should be exercised in favour of the applicant, the Tribunal noted the following statements in GSTR 2000/17 Goods and Services Tax : Tax invoices : | 39. There may be other special circumstances that arise for which the Commissioner will treat a document as a tax invoice that does not satisfy all the requirements. For example, you may claim an input tax credit without knowing that the tax invoice for the acquisition does not fully satisfy the requirements of subsection 29-70(1). For example, the ABN shown may not be the correct number. | 40. The Commissioner may treat this document as a tax invoice if you claimed the input tax credit while exercising reasonable care and acting in good faith. Reasonable care requires that you exercise the care that a reasonable, ordinary person would exercise to fulfil that person's tax obligations. A person exercising reasonable care may make an honest mistake based on reasonable grounds. | The Tribunal went on to say: | I doubt that "special circumstances" need be shown as the Commissioner's Ruling suggests. Nothing in the legislation suggests that that ought to be so. Nonetheless it seems to me to be consistent with the legislation to exercise the discretion favourably to a person exercising reasonable care and acting in good faith. (paragraph 30 of reasons for decision; the first sentence has a footnote reference to Dixon v Federal Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287 at 21.) | GSTR 2000/17 also refers to Law Administration Practice Statement PS LA 2004/11 The Commissioner's discretions to treat a particular document as a tax invoice or adjustment note , where the Commissioner expresses the view at paragraph 4 that '[e]ach case has to be considered on its merits and on the basis of all the relevant facts'.

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

Legislative references: Administrative Appeals Tribunal Act 1975 26 A New Tax System (Goods and Services Tax) Act 1999 29-10 29-70 Taxation Administration Act 1953 12-190 16-30 284-90 284-225 298-20 Taxation Administration Regulations 1976 Regulation 38 A New Tax System (Goods and Services Tax) Regulations 1999 (No. 1) Regulation 29-70.01
Case references: Dixon v Federal Commissioner of Taxation 167 FCR 287 2008 ATC 20-015 69 ATR 627
Subject references: Entitlement to input tax credits Discretion to treat as a tax invoice a document that is not a tax invoice Tax shortfall penalty for false or misleading statements Voluntary disclosure after notice of tax audit Administrative penalty for failure to withhold Amended assessments issued after application to the Tribunal for review of Commissioner's decision Tribunal not bound to accept incorrect concessions by the Commissioner