Barakat and Ors and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (NT2006/393)
Judgment date: 19 July 2007
Date published: 16 November 2007

Summary of decision:
Outlines the Tax Office's response to this case which concerned whether a taxpayer is liable for an administrative penalty on the basis that the taxpayer's behaviour when lodging activity statements was reckless.

Overview of facts:
• The Applicant was a partnership carrying on a project management and construction business, acquiring land on which it constructed townhouses. • The Applicant was registered for GST and accounted for GST monthly on a cash basis. • In May and June 2004, the Applicant settled sales of townhouses but did not report the sales in its activity statements. • The Applicant retained a tax agent who prepared year end financial statements and income tax returns, but not activity statements which were prepared by Mr M Barakat of the Applicant partnership. • After lodgement of the activity statements for May and June 2004, Mr Barakat had a conversation with the Tax Office following which the Applicant's GST registration was cancelled with effect from that date. • The Tribunal was satisfied that Mr Barakat believed that the officer with whom he spoke advised that GST on the sales could be included in the partnership's final income tax return to be prepared by the tax agent, but was not satisfied that the officer in fact gave that advice. • In other words, Mr Barakat misunderstood the tax officer's advice. He was heading overseas after the end of the construction project and mistakenly believed that the GST would be brought to account with the final income tax return as the outstanding liability depended on valuations to be obtained by professional advisers. | • The Applicant was a partnership carrying on a project management and construction business, acquiring land on which it constructed townhouses. • The Applicant was registered for GST and accounted for GST monthly on a cash basis. • In May and June 2004, the Applicant settled sales of townhouses but did not report the sales in its activity statements. • The Applicant retained a tax agent who prepared year end financial statements and income tax returns, but not activity statements which were prepared by Mr M Barakat of the Applicant partnership. • After lodgement of the activity statements for May and June 2004, Mr Barakat had a conversation with the Tax Office following which the Applicant's GST registration was cancelled with effect from that date. • The Tribunal was satisfied that Mr Barakat believed that the officer with whom he spoke advised that GST on the sales could be included in the partnership's final income tax return to be prepared by the tax agent, but was not satisfied that the officer in fact gave that advice. • In other words, Mr Barakat misunderstood the tax officer's advice. He was heading overseas after the end of the construction project and mistakenly believed that the GST would be brought to account with the final income tax return as the outstanding liability depended on valuations to be obtained by professional advisers. | Issue decided by the Court or Tribunal | The issue decided by the Tribunal was whether the Applicant is liable for an administrative penalty for recklessness as to the operation of the law in respect of the GST shortfall, arising out of the failure to include the sales of the townhouses in the relevant activity statements, pursuant to Division 284 of Schedule 1 to the Taxation Administration Act 1953 (TAA). | The Tribunal decided that, in accordance with s284-15(2), the Applicant is not liable for an administrative penalty, as the Applicant exercised reasonable care.

Issues decided:
The issue decided by the Tribunal was whether the Applicant is liable for an administrative penalty for recklessness as to the operation of the law in respect of the GST shortfall, arising out of the failure to include the sales of the townhouses in the relevant activity statements, pursuant to Division 284 of Schedule 1 to the Taxation Administration Act 1953 (TAA). The Tribunal decided that, in accordance with s284-15(2), the Applicant is not liable for an administrative penalty, as the Applicant exercised reasonable care.

ATO view of decision:
The Tax Office position is that s.284-215(2) in Schedule 1 to the TAA requires a decision maker to consider whether, at the time of making the statement, the taxpayer or taxpayer's agent took reasonable care to ensure the statement was not false or misleading. | The Tribunal took into account a telephone call made by the taxpayer, which the Tribunal found had occurred after the lodgement of the activity statements. With respect, to the extent that the Tribunal took into account the telephone conversation, we consider that the Tribunal took into account a consideration that was not relevant to whether the Applicant exercised reasonable care in the preparation and lodgement of the activity statements. | However, the Tax Office considers that overall the outcome in this case is one that turned on its own particular facts. For example, the Tribunal noted that Mr Barakat was endeavouring to finalise his affairs at a time of stress before leaving the country. He did make contact with the Tax Office and did seek to obtain advice. The Tribunal considered that he was not frivolous or irrational and noted there was no evidence of errors or mistakes in the past. It is clear that this is a case where the Tribunal, upon hearing the Applicant's evidence, decided that the Applicant was genuinely mistaken and acted with reasonable care. | Further, the Tribunal indicated that if, contrary to its view, a penalty was applicable, it would have remitted the penalty. Accordingly, even if on appeal it was concluded that the Tribunal took into account an irrelevant consideration, the Federal Court might well decline to remit the decision to the Tribunal. | In those circumstances, we consider that it would not be a responsible use of resources for the Tax Office to appeal against this decision. Accordingly, the Tax Office will not appeal to the Federal Court against the decision of the Tribunal in this matter.

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

Legislative references: Taxation Administration Act 1953 284-15 284-75 284-90 284-225 298-20 A New Tax System (Goods and Services Tax) Act 1999 section 9-40 Division 75
Case references: BRK (Bris) Pty Limited v Federal Commissioner of Taxation 2001 ATC 4111 (2001) 46 ATR 347 Re Michael and Sara Kowaldo and Commissioner of Taxation [2004] AATA 786
Subject references: GST administrative penalty recklessness reasonable care