JHDY and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2008/1457-1460)
Judgment date: 18 May 2009
Date published: 3 August 2009
Decision outcome: Partly favourable

Summary of decision:
Outlines the Tax Office's response to this case which concerned whether omitted trust distributions, including profits derived from the promotion of tax avoidance scheme arrangements, were assessable. Whether tax shortfall penalties were correctly imposed.

Overview of facts:
• The taxpayer was a registered tax agent who was involved in the promotion of 3 tax avoidance schemes. The schemes were financed and managed by companies of which the taxpayer was a director, and accounted for through the taxpayer's family trust, of which he was a beneficiary. • The Commissioner assessed the taxpayer on omitted distributions from his family trust, which included profits derived from the promotion of the tax avoidance schemes. In relation to the profits from scheme promotion, the Commissioner adopted alternative bases of assessment i.e., either net increases in the taxpayer's loan account with the family trust in the 1999 and 2000 years of income, or reductions in the loan account in the 2001 and 2002 years of income. • Tax shortfall penalties were imposed at 75% (shortfalls caused by intentional disregard) in relation to the scheme profits, and at 50% for the balance of the omitted family trust distributions. | • The taxpayer was a registered tax agent who was involved in the promotion of 3 tax avoidance schemes. The schemes were financed and managed by companies of which the taxpayer was a director, and accounted for through the taxpayer's family trust, of which he was a beneficiary. • The Commissioner assessed the taxpayer on omitted distributions from his family trust, which included profits derived from the promotion of the tax avoidance schemes. In relation to the profits from scheme promotion, the Commissioner adopted alternative bases of assessment i.e., either net increases in the taxpayer's loan account with the family trust in the 1999 and 2000 years of income, or reductions in the loan account in the 2001 and 2002 years of income. • Tax shortfall penalties were imposed at 75% (shortfalls caused by intentional disregard) in relation to the scheme profits, and at 50% for the balance of the omitted family trust distributions. | Issues decided by the court or tribunal | • The Tribunal found that the omitted distributions from the family trust for the 2000 and 2001 years were properly assessable to the taxpayer. In relation to the distributions for the 2002 year of income, and consistent with a concession made by the Commissioner about the application of the decision in the Zeta Force Pty Ltd case, the Tribunal reduced the amount assessable to the taxpayer to his proportional entitlement to the net income of the trust estate (paragraphs 31 to 36). • The Tribunal did not accept that the taxpayer was not assessable in relation to the scheme profits. It found that the appropriate basis of assessment was by reference to the reductions in the taxpayer's loan account with the family trust in the 2001 and 2002 years of income. On the evidence available, the Tribunal concluded that the taxpayer had not discharged the onus of proving that the assessments for those years in relation to the scheme profits were excessive (paragraphs 40 to 49). • The Tribunal agreed that tax shortfall penalty of 75% was correctly applied by the Commissioner in relation to the assessments of scheme profits. It also agreed that penalty of 50% was correctly applied in respect of the omitted trust distribution for the 2001 year. However, the Tribunal reduced the penalty imposed from 50% to 25% in relation to the adjusted trust distribution for the 2002 year, and, given the mitigating circumstances referred to in paragraph 31 of the decision, remitted in full the penalty imposed in respect of the omitted trust distribution for the 2000 year of income (paragraphs 52 and 53). | • The Tribunal found that the omitted distributions from the family trust for the 2000 and 2001 years were properly assessable to the taxpayer. In relation to the distributions for the 2002 year of income, and consistent with a concession made by the Commissioner about the application of the decision in the Zeta Force Pty Ltd case, the Tribunal reduced the amount assessable to the taxpayer to his proportional entitlement to the net income of the trust estate (paragraphs 31 to 36). • The Tribunal did not accept that the taxpayer was not assessable in relation to the scheme profits. It found that the appropriate basis of assessment was by reference to the reductions in the taxpayer's loan account with the family trust in the 2001 and 2002 years of income. On the evidence available, the Tribunal concluded that the taxpayer had not discharged the onus of proving that the assessments for those years in relation to the scheme profits were excessive (paragraphs 40 to 49). • The Tribunal agreed that tax shortfall penalty of 75% was correctly applied by the Commissioner in relation to the assessments of scheme profits. It also agreed that penalty of 50% was correctly applied in respect of the omitted trust distribution for the 2001 year. However, the Tribunal reduced the penalty imposed from 50% to 25% in relation to the adjusted trust distribution for the 2002 year, and, given the mitigating circumstances referred to in paragraph 31 of the decision, remitted in full the penalty imposed in respect of the omitted trust distribution for the 2000 year of income (paragraphs 52 and 53).

Issues decided:
• The Tribunal found that the omitted distributions from the family trust for the 2000 and 2001 years were properly assessable to the taxpayer. In relation to the distributions for the 2002 year of income, and consistent with a concession made by the Commissioner about the application of the decision in the Zeta Force Pty Ltd case, the Tribunal reduced the amount assessable to the taxpayer to his proportional entitlement to the net income of the trust estate (paragraphs 31 to 36). • The Tribunal did not accept that the taxpayer was not assessable in relation to the scheme profits. It found that the appropriate basis of assessment was by reference to the reductions in the taxpayer's loan account with the family trust in the 2001 and 2002 years of income. On the evidence available, the Tribunal concluded that the taxpayer had not discharged the onus of proving that the assessments for those years in relation to the scheme profits were excessive (paragraphs 40 to 49). • The Tribunal agreed that tax shortfall penalty of 75% was correctly applied by the Commissioner in relation to the assessments of scheme profits. It also agreed that penalty of 50% was correctly applied in respect of the omitted trust distribution for the 2001 year. However, the Tribunal reduced the penalty imposed from 50% to 25% in relation to the adjusted trust distribution for the 2002 year, and, given the mitigating circumstances referred to in paragraph 31 of the decision, remitted in full the penalty imposed in respect of the omitted trust distribution for the 2000 year of income (paragraphs 52 and 53). • The Tribunal found that the omitted distributions from the family trust for the 2000 and 2001 years were properly assessable to the taxpayer. In relation to the distributions for the 2002 year of income, and consistent with a concession made by the Commissioner about the application of the decision in the Zeta Force Pty Ltd case, the Tribunal reduced the amount assessable to the taxpayer to his proportional entitlement to the net income of the trust estate (paragraphs 31 to 36). • The Tribunal did not accept that the taxpayer was not assessable in relation to the scheme profits. It found that the appropriate basis of assessment was by reference to the reductions in the taxpayer's loan account with the family trust in the 2001 and 2002 years of income. On the evidence available, the Tribunal concluded that the taxpayer had not discharged the onus of proving that the assessments for those years in relation to the scheme profits were excessive (paragraphs 40 to 49). • The Tribunal agreed that tax shortfall penalty of 75% was correctly applied by the Commissioner in relation to the assessments of scheme profits. It also agreed that penalty of 50% was correctly applied in respect of the omitted trust distribution for the 2001 year. However, the Tribunal reduced the penalty imposed from 50% to 25% in relation to the adjusted trust distribution for the 2002 year, and, given the mitigating circumstances referred to in paragraph 31 of the decision, remitted in full the penalty imposed in respect of the omitted trust distribution for the 2000 year of income (paragraphs 52 and 53).

ATO view of decision:
Once the Tribunal accepted that the taxpayer was assessable in relation to the scheme profits, it was open to the Tribunal, on the evidence available, to find that the profits were assessable to the taxpayer in the 2001 and 2002 years, rather than in the earlier years on the alternative basis adopted by the Commissioner. | It was also open to the Tribunal, on the evidence presented, to reduce the penalties payable in relation to some of the tax shortfalls. However, the Tax Office notes that the Tribunal accepted that 75% penalty was correctly imposed in relation to the assessment of scheme profits.

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

Legislative references: Income Tax Assessment Act 1936 97(1) 226H 226J 227 Income Tax Assessment Act 1997 6-5 6-10 6-15 Tax Administration Act 1953 14ZL(1) 14ZL(2) 14ZQ 14ZZK(b)
Case references: FC of T v Dalco [1990] HCA 3 168 CLR 614 90 ATC 4088 20 ATR 1370 Zeta Force Pty Ltd v FC of T (1998) 84 FCR 70 98 ATC 4681 39 ATR 277
Subject references: Omitted income Burden of proof Penalties