Keitac Pty Ltd and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (QT2006/329)
Judgment date: 4 April 2007
Date published: 30 July 2007
Decision outcome: Adverse

Summary of decision:
This case concerns whether an administrative penalty for lack of reasonable care was properly imposed and whether the penalty should have been remitted in full or in part.

Overview of facts:
• Keitac Pty Ltd atf McNamara Property Development Trust ('Keitac') was negotiating to purchase land for the purpose of property development. • A draft contract was prepared with no special conditions. • Keitac sought advice from its accountants as to whether the going concern exemption with respect to GST would apply, but was advised that the exemption did not apply. • Subsequently Keitac entered into a contract in which a special condition had been mistakenly inserted that the 'Margin Scheme is to be applied to the Supply of the Property'. Keitac was not aware of this special condition at the time of signing the contract and consequently did not advise its accountants of the special condition. • The accountants prepared an Activity Statement for Keitac and claimed an input tax credit (ITC) for the acquisition of the land pursuant to Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 ('the GST Act'). Section 75-20 of the GST Act provides that supplies under a margin scheme do not give rise to creditable acquisitions. • Prior to preparing the Activity Statement the accountants requested from Keitac the 'key terms' of the contract. Keitac provided to the accountants the first page only of the contract and did not provide page two of the contract which contained the special condition that the margin scheme was to apply. The information contained in the first page of the contract did not indicate that Keitac was not entitled to claim the input tax credit and was consistent with the earlier advice of the accountants. • Neither the accountants nor Keitac held a tax invoice for the acquisition of the land. • The Commissioner requested a full copy of the contract and after reviewing the special condition made the accountants aware that no entitlement existed for input tax credits. A GST assessment issued for the shortfall and a notice of assessment of penalty issued at a rate of 25% of the shortfall amount. The Commissioner decided that Keitac or the accountants had failed to exercise reasonable care in complying with a taxation law. The penalty was in the amount of $23,863.75. • The Commissioner did not exercise his discretion to remit the penalty imposed pursuant to subsection 298-20(1) of Schedule 1 to the Taxation Administration Act 1953 . | • Keitac Pty Ltd atf McNamara Property Development Trust ('Keitac') was negotiating to purchase land for the purpose of property development. • A draft contract was prepared with no special conditions. • Keitac sought advice from its accountants as to whether the going concern exemption with respect to GST would apply, but was advised that the exemption did not apply. • Subsequently Keitac entered into a contract in which a special condition had been mistakenly inserted that the 'Margin Scheme is to be applied to the Supply of the Property'. Keitac was not aware of this special condition at the time of signing the contract and consequently did not advise its accountants of the special condition. • The accountants prepared an Activity Statement for Keitac and claimed an input tax credit (ITC) for the acquisition of the land pursuant to Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 ('the GST Act'). Section 75-20 of the GST Act provides that supplies under a margin scheme do not give rise to creditable acquisitions. • Prior to preparing the Activity Statement the accountants requested from Keitac the 'key terms' of the contract. Keitac provided to the accountants the first page only of the contract and did not provide page two of the contract which contained the special condition that the margin scheme was to apply. The information contained in the first page of the contract did not indicate that Keitac was not entitled to claim the input tax credit and was consistent with the earlier advice of the accountants. • Neither the accountants nor Keitac held a tax invoice for the acquisition of the land. • The Commissioner requested a full copy of the contract and after reviewing the special condition made the accountants aware that no entitlement existed for input tax credits. A GST assessment issued for the shortfall and a notice of assessment of penalty issued at a rate of 25% of the shortfall amount. The Commissioner decided that Keitac or the accountants had failed to exercise reasonable care in complying with a taxation law. The penalty was in the amount of $23,863.75. • The Commissioner did not exercise his discretion to remit the penalty imposed pursuant to subsection 298-20(1) of Schedule 1 to the Taxation Administration Act 1953 . | Issues decided by the tribunal | The Tribunal affirmed the Commissioner's decision to impose a penalty of 25% on the tax shortfall and found: 'while there are some mitigating factors there is clearly negligence on the part of the applicant from a legal point of view'. | Further the Tribunal also concluded that 'the Tax Agent has demonstrated a lack of reasonable care in a number of respects in relation to its legal obligation of demonstrating 'reasonable care''. | The Tribunal set aside the Commissioner's decision not to remit the penalty (at least partially), determining that the penalty should be fixed at $12,000. | In doing so, the Tribunal concluded that not to grant some relief to the applicant would be unjust, observing: 'While he made a mistake and he was negligent, his legal obligations had been undermined by the level of service of the Real Estate Agent and to some degree, his Tax Agent'. The Tribunal also noted the applicant's otherwise good compliance record.

Issues decided:
The Tribunal affirmed the Commissioner's decision to impose a penalty of 25% on the tax shortfall and found: 'while there are some mitigating factors there is clearly negligence on the part of the applicant from a legal point of view'. Further the Tribunal also concluded that 'the Tax Agent has demonstrated a lack of reasonable care in a number of respects in relation to its legal obligation of demonstrating 'reasonable care''. The Tribunal set aside the Commissioner's decision not to remit the penalty (at least partially), determining that the penalty should be fixed at $12,000. In doing so, the Tribunal concluded that not to grant some relief to the applicant would be unjust, observing: 'While he made a mistake and he was negligent, his legal obligations had been undermined by the level of service of the Real Estate Agent and to some degree, his Tax Agent'. The Tribunal also noted the applicant's otherwise good compliance record.

ATO view of decision:
The Commissioner will not appeal the decision of the Tribunal setting aside the decision not to remit penalty and fixing the penalty at $12,000. | While the Commissioner considers that administrative penalty could not be remitted solely on the basis that an error was caused by a tax agent completing an activity statement on a taxpayer's behalf, in this case the Tribunal mainly had regard to the applicant's good compliance record and the actions of the real estate agent and only 'to some extent' those of the tax agent. | The Commissioner accepts that the decision to partially remit the penalty is one that was open to the Tribunal on the facts of the case.

Administrative treatment:
Implications on current Public Rulings & Determinations | There are no implications with respect to any current Public Rulings or Determinations.

Legislative references: Taxation Administration Act 1953 284-25 284-75 284-90 298-20 A New Tax System (Goods and Services Tax ) Act 1999 9-5 29-10 75-20
Case references: Commissioner of Taxation v Hornibrook [2006] FCAFC 170 (2006) 156 FCR 313 65 ATR 1 2006 ATC 4761 Graham Docker and Associates Pty Ltd and Commissioner of Taxation 61 ATR 1077 [2005] AATA 1180 2005 ATC 2404 Smith v Jones [1954] 2 All ER 823 [1954] 1 WLR 1089 Taylor v Johnson (1983) 151 CLR 422 (1983) 45 ALR 265 Solle v Butcher [1950] 1 KB 671 Goldsbrough Mort and Co Ltd v Quinn (1910) 10 CLR 674 (1910) 17 ALR 42 Re Sparks and Federal Commissioner of Taxation [2000] AATA 28 43 ATR 1324 Re Arnett and Federal Commissioner of Taxation 39 ATR 1095 98 ATC 2137 Re Kowadlo and Kowadlo and Commissioner of Taxation [2004] AATA 786 Starr v Commissioner of Taxation of the Commonwealth of Australia [2007] FCA 23 2007 ATC 4080 65 ATR 86
Subject references: Goods and Service Tax Penalty Imposition Penalty Remission
Other references: Practice Statement Law Administration PS LA 2006/2