The Taxpayers and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2007/1955, 2007/1956-61, 2007/1964, 2007/1966-69, 2007/2905-2910)
Judgment date: 14 August 2014
Date published: 9 October 2014

Summary of decision:
Outlines the ATO's response to this case which concerned audit adjustments made in relation to GST payable, superannuation and interest deductions claimed, deemed dividends and undeclared income.

Overview of facts:
One of the applicants was the sole shareholder and director of the other two applicants, the second of which was incorporated to act as the manager of a low cost government loan program. The applicants argued that the second company served as an agent of the first company. The Commissioner did not accept this proposition. All three applicants were subject to an audit with respect to their Business Activity Statements and Income Tax Returns. | As a result of the audit, the Commissioner: disallowed deductions claimed by the companies for superannuation and interest expenses; increased the remuneration received by the first company from government agencies; included deemed dividends in the income of the individual taxpayer; and imposed penalty at the rate of 75% for intentional disregard (a 20% uplift factor was applied to the penalty for obstructing the Commissioner during course of the audit). | Issues decided by the tribunal | 1. Was the second company an agent of the first company? | The applicants argued that the second company received its income as agent for the first company. The Tribunal agreed with the Commissioner that there was not an agency relationship [67]. | 2. Was the company entitled to claim a deduction for superannuation expenses? | The Tribunal agreed that one of the companies had failed to make superannuation contributions for two of its employees. The Tribunal also found that the company was entitled to have its assessment varied to the extent of any amount wrongly disallowed for superannuation expenses [88]. | 3. Was the first company entitled to a deduction for interest expenses? | The Tribunal was satisfied that there was sufficient evidence to be satisfied that the first company was entitled to a deduction for the amount of the interest expenses claimed in the 2002 income year [95]. | 4. Quantum of money attributable to the second company for money received from government agencies. | With respect to the quantum of the remuneration received by the second company for the Department of Housing contract, the Tribunal accepted the evidence of the applicant of the amounts actually received [121]. | 5. Should the individual's assessable income include a deemed dividend? | The Tribunal found that there were no payments made by the second company to the first company for the benefit of the individual which could attract the operation of sections 109C or 109D of the Income Tax Assessment Act 1936 (ITAA 36). The Tribunal also accepted that there was a complying loan agreement for the purposes of section 109N ot the ITAA 36 in relation to a loan made by another company to the individual [153], [167] and [182]. | 6. Should the base penalty be maintained at 75% for intentional disregard? | The Tribunal found that the correct base penalty finding should be based on recklessness and not intentional disregard - the applicants were 'grossly indifferent as to whether or not the material was true or correct and whether the Act and regulations may not operate correctly' [207] and [208]. | 7. Penalty uplift | The Tribunal found that the facts did not support a penalty uplift - the applicants did not seek to, nor did in fact, prevent or obstruct the audit process in the sense of impeding it taking its course [239]. | 8. Should the penalty be remitted? | The Tribunal noted that a penalty being harsh in all of the circumstances of a taxpayer will be a proper basis on which the discretion to remit the penalty could be exercised In this case, the Tribunal found that the penalties imposed ought to be remitted to reflect the extent to which any one entity's "shortfall amount" did not actually result in a loss to revenue [240] - [243].

Issues decided:
1. Was the second company an agent of the first company?: The applicants argued that the second company received its income as agent for the first company. The Tribunal agreed with the Commissioner that there was not an agency relationship [67]. | 2. Was the company entitled to claim a deduction for superannuation expenses?: The Tribunal agreed that one of the companies had failed to make superannuation contributions for two of its employees. The Tribunal also found that the company was entitled to have its assessment varied to the extent of any amount wrongly disallowed for superannuation expenses [88]. | 3. Was the first company entitled to a deduction for interest expenses?: The Tribunal was satisfied that there was sufficient evidence to be satisfied that the first company was entitled to a deduction for the amount of the interest expenses claimed in the 2002 income year [95]. | 4. Quantum of money attributable to the second company for money received from government agencies.: With respect to the quantum of the remuneration received by the second company for the Department of Housing contract, the Tribunal accepted the evidence of the applicant of the amounts actually received [121]. | 5. Should the individual's assessable income include a deemed dividend?: The Tribunal found that there were no payments made by the second company to the first company for the benefit of the individual which could attract the operation of sections 109C or 109D of the Income Tax Assessment Act 1936 (ITAA 36). The Tribunal also accepted that there was a complying loan agreement for the purposes of section 109N ot the ITAA 36 in relation to a loan made by another company to the individual [153], [167] and [182]. | 6. Should the base penalty be maintained at 75% for intentional disregard?: The Tribunal found that the correct base penalty finding should be based on recklessness and not intentional disregard - the applicants were 'grossly indifferent as to whether or not the material was true or correct and whether the Act and regulations may not operate correctly' [207] and [208]. | 7. Penalty uplift: The Tribunal found that the facts did not support a penalty uplift - the applicants did not seek to, nor did in fact, prevent or obstruct the audit process in the sense of impeding it taking its course [239]. | 8. Should the penalty be remitted?: The Tribunal noted that a penalty being harsh in all of the circumstances of a taxpayer will be a proper basis on which the discretion to remit the penalty could be exercised In this case, the Tribunal found that the penalties imposed ought to be remitted to reflect the extent to which any one entity's "shortfall amount" did not actually result in a loss to revenue [240] - [243].

ATO view of decision:
The ATO accepts that the decision on income tax and GST was reasonably open to the Tribunal on the facts as found. | It is not clear whether the Tribunal's decision to reduce all of the penalties imposed under section 284-75 of Schedule 1 to the Taxation Administration Act 1953 to nil was influenced by the conclusion that there was no loss to the revenue (see paragraph [243]). However, the Commissioner would note that the Full Federal Court in Dixon v FCT (2008) 167 FCR 287, at [19] to [21], made it clear that absence of loss of revenue is not a relevant consideration in relation to the exercise of the discretion to remit a penalty for a false statement. | The Commissioner would also note that the Full Federal Court in Sanctuary Lakes Pty Ltd v FCT [2013] FCAFC 50, at [247] to [249], said that the correct question when remitting a penalty for a false statement is not expressed in terms of 'harshness', but rather as to whether the decision maker is satisfied, having regards to a taxpayer's particular circumstances, that it is appropriate to remit the penalty.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings & Determinations etc) | Nil | Implications for impacted Law Administration Practice Statements | Nil | PS LA 2006/2 | PS LA 2012/4 | PS LA 2012/5

Legislative references: Income Tax Assessment Act 1936 Part III, Division 7A Taxation Administration Act 1953 Schedule 1, Part 4-25
Case references: Hart v Commissioner of Taxation (2003) 131 FCR 203 [2003] FCAFC 105 (2003) 2003 ATC 4665 (2003) 53 ATR 371 BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] FCA 164 [2001] FCA 164 (2001) 2001 ATC 4111 (2001) 46 ATR 347
Subject references: GST payable intentional disregard penalties recklessness remission undeclared income uplift factor