FEDERAL COURT OF AUSTRALIA
Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50
| IN THE FEDERAL COURT OF AUSTRALIA | |
| Applicant | |
| AND: | COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent |
| DATE OF ORDER: | |
| WHERE MADE: | SYDNEY (HEARD IN MELBOURNE) |
THE COURT ORDERS THAT:
2. The applicant pay the respondent’s costs as agreed or taxed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
| IN THE FEDERAL COURT OF AUSTRALIA | |
| victoria DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 521 of 2012 |
| ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL |
| BETWEEN: | COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Applicant |
| AND: | SANCTUARY LAKES PTY LTD Respondent |
| JUDGES: | EDMONDS, GREENWOOD AND GRIFFITHS JJ |
| DATE OF ORDER: | 24 MAY 2013 |
| WHERE MADE: | SYDNEY (HEARD IN melbourne) |
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The applicant pay the respondent’s costs as agreed or taxed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
| victoria DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 520 of 2012 |
| ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL |
| BETWEEN: | SANCTUARY LAKES PTY LTD Applicant |
| AND: | COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent |
| IN THE FEDERAL COURT OF AUSTRALIA | |
| NEW SOUTH WALES DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 521 of 2012 |
| ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL |
| BETWEEN: | COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Applicant |
| AND: | SANCTUARY LAKES PTY LTD Respondent |
| JUDGES: | EDMONDS, GREENWOOD AND GRIFFITHS JJ |
| DATE: | 24 MAY 2013 |
| PLACE: | SYDNEY (HEARD IN melbourne) |
REASONS FOR JUDGMENT
EDMONDS J:
Introduction
1 These are appeals from a decision of the Administrative Appeals Tribunal (“Tribunal”) ([2012] AATA 404) to:
(1) affirm the Commissioner’s objection decisions dated 23 December 2009 and 23 February 2010 disallowing the applicant’s objections to assessments of income tax; and
(2) in relation to the Commissioner’s objection decisions disallowing the applicant’s objections to assessments of penalties:
(a) set aside those decisions to the extent that they impose a penalty in relation to the applicant’s claim for a deduction of $1,275,800 in the 2003 income year for expenditure in relation to its obligations under s 173 of the Planning and Environment Act 1987 (Vic); and
(b) otherwise affirm the decisions.
2 The applicant in VID 520 of 2012 (“the primary tax appeal”) is Sanctuary Lakes Pty Ltd (“Lakes”) which appeals against the Tribunal’s decision to affirm the Commissioner’s objection decisions disallowing Lakes’ objections to assessments of income tax for the year of income ended 30 June 2003 (“year of income”) and imposing penalties for claims for deductions in respect of items identified in the Tribunal as Issues 1, 3 and 5 (see [5] below). For the reasons which follow, Lakes’ appeal should be dismissed.
3 The applicant in VID 521 of 2012 (“the penalty remission appeal”) is the Commissioner who appeals against the Tribunal’s decision to vary the penalty payable in relation to Lakes’ claim for a deduction in respect of the item identified in the Tribunal as Issue 5 (see [5] below) by remitting the penalty to 0% pursuant to s 298-20 of Sch 1 to the Taxation Administration Act 1953 (Cth) (“TAA 1953”). I have had the great advantage of reading the reasons for judgment of Griffiths J. I agree with those reasons and with his Honour’s conclusion that the Commissioner’s appeal should be dismissed.
4 For a dispute involving five (leaving aside consequential penalty issues) relatively simple issues in the Tribunal, only four of which were pressed in this Court on appeal and all of which are concerned with whether losses or outgoings incurred by Lakes in respect of inter-related transactions in connection with the development of a residential resort, golf course and club house at Point Cook in Victoria are allowable deductions under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (“1997 Act”) or, if allowable deductions, whether the loss or outgoing is deductible in the year of income, this appeal has generated more alleged questions of law and grounds of appeal than can, on any view, be justified by the exigencies of the case. At the commencement of the hearing, the Court was literally inundated with amendments to existing questions of law and grounds of appeal, tables cross-referencing questions of law and alleged errors of law to existing notices of appeal, contention and supplementary or amended notices of appeal and contention. What has occurred is certainly not a paradigm for the manner in which tax disputation should be conducted in the tribunals and courts of this country. Confronted with so much paper, incorporating amendments and cross-references to other pieces of paper, the Court had no alternative but to inform the parties that unless a matter was specifically raised in the course of oral argument, the Court would not address the matter even if it was hidden by way of submission in the volume of paper relied upon by each party.
The Primary Tax Appeal: VID 520 of 2012
5 Lakes’ supplementary notice of appeal dated 4 October 2012 contained 18 grounds of appeal, two of which were abandoned at the commencement of the hearing, raising what were said to be 14 questions of law, relating, inter alia, to the issues identified (some perhaps incorrectly), in the Tribunal’s reasons (“R”) at [2]:
1. Issue 1: Lakes’ entitlement to a deduction in the year of income under s 8-1 of the 1997 Act for a loss of $8,436,342 realised when it sold 527 memberships in Sanctuary Lakes Golf Club Ltd (“SLGC”) to Links Sanctuary Lakes Pty Ltd (“Links”) effective 30 June 2003.
2. Issue 3: Lakes’ entitlement to a deduction in the year of income under s 8-1 of the 1997 Act for a loss of $3,410,252 in respect of its forgiveness of a debt in that sum owed to it by Sanctuary Lakes Residents Association Ltd (“SLRA”).
3. Issue 4: Lakes’ entitlement to a deduction in the year of income (as opposed to a later year of income) under s 8-1 of the 1997 Act of $4,134,000 in respect of its obligations to undertake development works under cl 5.2 of an agreement between Links, Lakes and Sanctuary Clubs Pty Ltd (“Clubs”) known as the “Loose Ends Agreement” dated 30 June 2003.
4. Issue 5: Lakes’ entitlement to a deduction in the year of income (as opposed to a later year of income) under s 8-1 of the 1997 Act of $1,275,800 for expenditure in relation to obligations under s 173 of the Planning and Environment Act 1987 (Vic) (“PE Act”) incurred under cl 5.2 of an agreement between Links, Lakes and Clubs known as the “Supplementary Agreement” bearing the date “6/5/2003”.
6 The remaining alleged questions of law, and grounds in respect thereof, related to Lakes’ liability for penalties imposed in relation to its claims in respect of items identified in the Tribunal as Issues 1, 3 and 5.
7 In respect of Issues 1 and 3, the Commissioner contended that the decision of the Tribunal should be affirmed on grounds other than those relied on by the Tribunal including, inter alia, that the losses were capital in nature and not deductible pursuant to s 8-1 of the 1997 Act and filed an amended notice of contention dated 17 August 2012 in reliance on that ground.
The Penalty Remission Appeal: VID 521 of 2012
8 The Commissioner’s notice of appeal dated 27 July 2012 contained two grounds of appeal, namely, that the Tribunal erred in finding that the penalty payable in relation to Lakes’ claim in respect of the item identified in the Tribunal as Issue 5 ought to be remitted to 0% pursuant to s 298-20 of Sch 1 to the TAA 1953 either because the Tribunal failed to apply the correct test or, alternatively, because it took into account an irrelevant consideration.
Factual Background
9 The factual background is uncontroversial. The Tribunal’s findings of primary fact are set out at R [21] to [109] and those that are relevant to the issues on appeal are, for convenience, reproduced below excluding footnotes. Neither Lakes nor the Commissioner took issue with any of these findings of primary fact.
The Gasing Group
10 The Sanctuary Gasing Group (“Gasing Group”), which comprises some 70 companies, is a Malaysian based property developer experienced in developing prime commercial and residential real estate in Malaysia, North America, Europe, China and Australia. Those developments often featured a lake and green surrounds as well as a golf club. Champion Plastic Industries Sdn Bhd (“Champion Plastics”) was also a member of the Gasing Group.
11 The Gasing Group had holding companies. In Malaysia, it had established Exclusive Region Sdn Bhd (“Exclusive Region”) in 1993 and used this as the ultimate holding company. In Australia, a company that was later to be renamed Sanctuary Holdings Pty Ltd (“Holdings”) was incorporated on 14 September 1995. Mr Kuok Ing Ting and Mr Yeow Khoon (Michael) Tan, both of whom were associated with the Gasing Group, held all of the shares in Holdings on trust for Exclusive Region.
Incorporation of Lakes and Clubs
12 Lakes is an Australian based member of the Gasing Group. It was incorporated on 3 June 1996 with Mr Yuh Lin Lee, Mr Kuok Ing Ting and Mr Tom Kotsimbos as directors. The two shares issued in Lakes were owned by Holdings.
13 Clubs was incorporated on the same day with Mr Yuh Lin Lee, Mr Kuok Ing Ting, Mr Yeow Khoon (Michael) Tan and Mr Tom Kotsimbos as directors. The two shares issued in Clubs were owned by Holdings.
The concept of the Sanctuary Lakes Resort
14 The Sanctuary Lakes Resort is a residential development at Point Cook in Victoria offering a “resort style” of living to its residents. What was encompassed in the concept of “resort style” varied over the years as work proceeded on the development and other problems and opportunities revealed themselves.
Setting the corporate and personnel structure in place
15 On 23 November 1995, the Sanctuary Lake Unit Trust (“Trust”) was established as a vehicle for providing debt capital to the Australian operating entities. Its trustee was Sanctuary Nominees Pty Ltd (“Nominees”), which is a subsidiary of Holdings.
16 On 28 June 1996, agreement was reached among seven investors (including Champion Plastics), Holdings as the Australian holding company and Exclusive Region as the ultimate holding company. The shares in Exclusive Region were held by the seven investors. Champion Plastics and three other investors each held a 20% interest, one held 10% and two each held 5%.
17 While the Gasing Group was the overall project manager, it appointed Asset Solutions Group Pty Ltd (“Asset Solutions”) as its Australian project manager. Asset Solutions was a land development consulting group. Mr Stephen Head was a director of Asset Solutions and he and Mr Yuh Lin Lee were appointed to undertake the daily activities and decision-making in relation to the project.
18 Mr Yuh Lin Lee reported to Mr Kenneth Tan, who has been a director and manager of the Gasing Group since 1995. Mr Kenneth Tan had overall responsibility for the project. His duties included liaising with Asset Solutions and other consultants, executive decision-making and financial review of the project. He liaised with the investors and their management and reported also to the board of the Gasing Group.
19 Another consultant appointed in connection with the project was Mr David Rennick, who was a partner at the time in Maddock Lonie and Chisolm, which is now known as Maddocks. Legal advice was sought principally from Maddocks although it was sought from other solicitors from time to time. Other consultants were Mr David Hunter of Coomes Consulting, civil and structural engineers – in relation to the planning and construction of the lake – and Mr Garth Greenaway of Greenaway and Katz Pty Ltd in relation to the planning and marketing of the property.
The land and the Section 173 Agreement
20 The vendor of the land, Laverton Heights Pty Ltd (“Laverton”), that ultimately became the Sanctuary Lakes development, had previously obtained planning approval to subdivide it. As part of the approval process, Laverton had entered a Planning Agreement with the City of Werribee, Melbourne Water Corporation, Melbourne Parks and Waterways, the Commissioners of the City of Hobsons Bay and the Roads Corporation under s 173 of the PE Act 1987 (“Section 173 Agreement”) in relation to various parcels of land situated at Point Cook.
21 Section 173(1) of the PE Act provides that a responsible authority may enter an agreement with an owner of land in the area covered by a planning scheme for which it is a responsible authority. Under s 8A(1) of the PE Act, a municipal council is a planning authority for any planning scheme in force in its municipal district. An agreement made under s 173 must bind the owner to the covenants specified in the agreement. It may provide for matters such as the prohibition, restriction or regulation of the use or development of the land or any matter intended to achieve or advance the objectives of the planning scheme.
22 Section 181(1) provides that a responsible authority may apply to the Registrar of Titles (“Registrar”) to register an agreement under s 173 provided it does not relate to Crown Land. The Registrar must record it in the Register kept under the Transfer of Land Act 1958. Registration means that the burden of any covenant in the agreement runs with the land affected. The responsible authority may enforce the covenant against any person who derives title from the person who entered the covenant.
23 Under cl 21.3 of the Section 173 Agreement, Laverton agreed to do all things necessary to enable the City of Werribee, as the Responsible Authority, to enter a memorandum of it on the Certificate of Title under s 181. Under cl 21.1, both agreed that the agreement had been made under s 173 and that, during its term, “the obligations imposed upon the Owner are intended to take effect as covenants which will be annexed to and run at law and in equity with the Land and bind the Owner”.
Purchase of land
24 On 25 September 1995, Champion Plastics entered a contract that either it or its nominee purchase various parcels of land at Point Cook from Laverton. Champion Plastics paid a deposit of $2.175m. Having been nominated by Champion Plastics as its nominees on 13 June 1996, Lakes and Clubs paid the balance of $12.325m on 30 June 1996 and became the registered proprietors of the various parcels of land.
25 Lakes and Clubs purchased the land subject to the encumbrances shown in Item 1 of the Schedule to the contract. Among those encumbrances was the Section 173 Agreement annexed to the contract. That agreement was the subject of cl 9 of the Special Conditions of the contract. Under that clause, the purchaser acknowledged that the land was subject to the Section 173 Agreement.
Development of residential properties and the golf course
26 Lakes’ primary role in the development was as the residential developer while that of Clubs was to develop the golf course, the club house and a limited amount of residential land that fell within the boundaries of the golf course.
27 The success of the project as a whole depended upon its successful marketing. That marketing focused on its golf course, its lake and its offering higher residential amenities than usual. The golf course was designed by Greg Norman and this fact featured in the promotional material for Sanctuary Lakes. The features that made Sanctuary Lakes attractive, required upkeep and two companies were incorporated to deal with that. One was to focus on the golf course and its associated facilities and the other on the remaining facilities.
Sanctuary Lakes Residents Association
28 Services over and above those offered by the council at the Sanctuary Lakes development were provided by the Sanctuary Lakes Residents Association. Those services related to landscaping, maintenance of the lake and general surrounds, sporting facilities, swimming pool and security. Each resident contributed approximately $1,000 for those services over and above the amount paid for council rates. In order to attract residents, Lakes had to ensure that those services were maintained as it was marketing the development as a prestigious and exclusive estate. Initially, it established a separate body corporate for each stage of its development. Difficulties arose because legislative restrictions meant that they could not spend money for services affecting property outside their geographical area of responsibility and so could not pool resources with other bodies corporate in the overall development.
Sanctuary Lakes Residents Association Limited
29 On 28 April 2000, SLRA was incorporated as a public company limited by guarantee. Mr Yuh Lin Lee, Mr Yeow Khoon (Michael) Tan and Mr Stephen Head were appointed as directors. It was established to overcome the difficulties encountered by the individual bodies corporate. Services it provided were directed to maintaining facilities other than those related to the golf course.
30 Early modelling had recognised that its income would be small in the initial stages as a person was not liable to pay a fee to SLRA until he or she acquired a particular property. Despite that, it had been assumed that there would be sufficient funds from an early stage to cover necessary expenditure. That did not prove to be the case and SLRA required further funding. SLRA required assistance to overcome its funding shortfall and those funds were provided by Lakes on the basis that they were loans that had to be repaid and to be used as working capital.
Sanctuary Lakes Golf Club
31 Before the golf course had been completed, Clubs established an unincorporated association known as the Sanctuary Lakes Golf Club under its administration. It sold memberships in the unincorporated association conferring a right to play on the course when it was completed. The projected completion date was June 1999. Clubs promoted the golf course and membership of it. Only a single class of membership was offered with an initial fee of some $28,000 to $30,000 followed by annual subscriptions. All membership fees were deposited into Maddocks’ Trust Account.
32 Prospective members were reluctant to pay membership fees of that magnitude in exchange for what was effectively a licence to play granted by Clubs as one of the developers of the land. They were concerned that, were the development to fail, or the golf course to be sold, they would have no recourse against subsequent owners to enforce their right to play on the course.
Sanctuary Lakes Golf Club Ltd
33 On 13 October 1998, SLGC was incorporated as a public company limited by guarantee. On 31 December 2002, it changed its name to Sanctuary Lakes Club Limited but is referred to throughout as SLGC. On incorporation, its directors were Mr Yuh Lin Lee (then also a director of Holdings and Lakes), Mr Yeow Khoon (Michael) Tan (Chairman of Gasing Group and then also a director of Holdings, Lakes and Clubs) and Mr Stephen Head (a director of Asset Solutions and an independent contractor in the development of Sanctuary Lakes). Each had been proposed by Lakes. Together, they comprised SLGC’s initial Board and were required to resign from office at the first Annual General Meeting arising after the expiration of two years from the date on which all memberships had been sold. After that time, only members of SLGC were eligible to be directors and their candidacy had to be proposed and seconded by a member. Other than the three proposed by Lakes, directors could be removed on a resolution passed by the members of SLGC at a General Meeting. As no more than five directors could be appointed as the Board, the three directors proposed by Lakes maintained control of the Board and so of SLGC.
34 The membership of SLGC comprised the Initial Members (i.e. the initial members at the time of incorporation), the Original Applicants (i.e. those persons who had applied for membership before incorporation and had paid or arranged to pay membership fees) and every other person admitted by the Board to membership.
35 Clause 7 of the Constitution of SLGC provided for membership of the club. Apart from the three initial members, who were to be private members, membership was divided into two categories: Private Membership and Honorary Membership. Private Membership was limited to 1,000 members and, unless SLGC determined otherwise, Honorary Membership was limited to ten members. The Memberships might be divided into any categories as SLGC determined. Other than Honorary Members, each member was required to pay annual Subscription Fees for the class of membership to which he or she belonged. That was the effect of cl 9.3 of the Constitution. Clause 9.2 provided that Membership Fees were to be payable by applicants for membership.
36 Clause 43.1 of SLGC’s constitution provided that “[t]he control and direction of the Club and the management of its property and affairs is vested in the Board”. The Board might exercise all of SLGC’s powers provided they did not have to be exercised by the club in a General Meeting provided for in the Constitution.
37 The Tribunal found that “[b]y and large” SLGC “conducted their own independent business activities without input in relation to those activities” but that did not mean that they operated without regard to considerations affecting the development of Sanctuary Lakes as a whole. It was found that Lakes was kept very much informed of what SLGC intended in relation to its business activities. Lakes would be advised, for example, if SLGC proposed to have a restaurant or a spike bar. That was inevitable given that one of SLGC’s directors was a director of Lakes and another a director of Clubs.
38 Membership and Subscription Fees were intended to provide a source of revenue for SLGC together with green fees, sales of food and drink from two outlets located in the Club House, functions and, to some extent, activities in the golf shop. The Tribunal found that the sale of memberships turned out to be weaker than had been expected despite extensive promotion of the course as a Greg Norman designed golf course. SLGC also had to turn to Lakes for funding. As with SLRA, funding was provided on the basis that it was to be repaid. At this stage, there was no written agreement to that effect but the Tribunal found, on the basis of the evidence of Mr Kenneth Tan, that Lakes advanced funds to SLGC for the purposes of providing working capital.
SLGC enters sale and purchase/management agreement with Clubs
39 SLGC reached an agreement with Clubs on 30 June 1999 to purchase the land on which the golf course was being built but was, at the time, incomplete. The purchase price was $6.5 million. The purpose of Clubs disposing of its interest was:
The disposal of the Site to the Principal is intended to provide a means for the Construction Manager to manage and conclude the development of the Site and to enable the Construction Manager to transfer the responsibility for the management and operation of the Golf Course to the Principal.
40 At the same time, SLGC agreed with Clubs that Clubs would be appointed as an independent contractor in the role of construction manager to manage and conclude the construction of the golf course by 1 December 1999 or another date agreed upon. Clubs provided its services for a fee which, under cl 6.3, would be “the proceeds from the sale of 1000 memberships in the Sanctuary Lakes Golf Club less the purchase price payable pursuant to the Land Sale Contract”. That fee was payable only after SLGC had paid the purchase price of the land. The purchase price of the land was paid with an initial deposit of $1.00 followed by payment on 1 December 1999 of the amount held in Maddock’s trust account on behalf of SLGC members as club membership fees and then by instalments as memberships were sold. Each instalment was equal to the membership fee paid by each new member and was payable to Clubs within seven days of receipt.
Actuarial valuation of membership sales
41 Lakes commissioned NSP Buck Pty Ltd (“Buck”) to prepare an actuarial valuation of the SLGC membership sales. Buck undertook the valuation on 1 July 2000 on the basis of discussions with Asset Solutions and relevant data it provided. It also discussed the matter with another valuer.
42 At the time, Buck recorded the sale of the memberships and their playing rights together with their sale price before and after 1 July 2000 were:
| Membership Category | Description | Sold 31 May 2000 | Unsold 31 May 2000 | Pre-GST Price $ | Post-GST Price $ |
| Diamond | One person to play 7 days per week plus one person to play 5 days per week | 286 | 14 | 30,000 | 33,000 2000/01 33,000 2001/02 |
| Gold | One person to play 7 days per week | 8 | 692 | 18,000 | 18,000 2000/01 19,800 2001/02 |
| Silver | One person to play 5 days per week | 6 | 694 | 12,000 | 12,000 2000/01 13,200 2001/02 |
| Total | 300 | 1,400 |
A total of $975,000 in membership fees was outstanding as at 31 May 2000. The majority of that sum was due from pending memberships allocated to two developers independent from the Sanctuary Lakes group. No GST was payable on those memberships. From 1 July 2000, it was proposed that the price of the Diamond membership would be increased from 1 July 2000 with those for Gold and Silver to follow with an increase of 10% on the pre-GST price.
43 For the purpose of the valuation, Buck assumed that SLGC would not repay the advances made to it by Lakes. It regarded each Diamond membership as a unit. A Gold membership was 0.6 of a unit and a Silver membership, 0.4 of a unit. On that basis, Buck found that, in the period from October 1996 to May 2000, the monthly sales ranged from zero to 18. The peak was reached when the golf course was opened in June 1999. Over the entire period, the average sales of memberships amounted to 6.7 per month. The 12 month moving average showed average sales of five to nine memberships each month.
44 As to future sales, Buck assumed that it was appropriate to assume that seven Gold and Silver memberships would be sold each month and that six of the remaining 14 Diamond memberships would be sold each year. It determined a discount rate intended to reflect the return expected from an investor having regard to the level of risk associated with receiving revenue from future membership sales. Buck found it difficult to quantify that risk as there was no similar investment available for comparison. It noted that the success of the membership sales depended on the successful operation of SLGC and the reputation of the golf course and that “[a] positive aspect is the continued involvement of the Developer who has a significant interest in the success of the Golf Club”. Buck decided that a discount rate in the order of 20% was consistent with assumptions used for sales and prices and the risk associated with future membership sales. It attributed a figure of 10% to those that had already been sold as at 31 May 2000 as there was a lower risk of the membership fees not being received.
45 The conclusion reached by Buck was that the actuarial value of future membership sales was $8,173,000 but, given the uncertainty of predicting sales, it also prepared a valuation based on lower and higher levels of sales and the consequent variation in the dates on which all of the memberships would be sold:
| Gold and Silver Membership Average Sales per month | Last Membership Sold | Capital Value 1 July 2000 $ |
| 5 (Low) | December 2011 | 6,353,000 |
| 7 (Central) | September 2008 | 8,173,000 |
| 9 (High) | November 2006 | 9,487,000 |
SLGC attempts to boost interest in its memberships
46 By 2000, SLGC’s membership sales had not improved. Various options were considered to change that situation. In February 2000, SLGC amended its constitution to introduce new categories of membership. The number of memberships in each category was limited as before. Existing members now became Diamond members and their number was limited to 300. There would be 700 Gold members and 700 Silver with ten or more, as determined, Honorary members. The membership fees were set at approximately $18,000 for Gold and $12,000 for Silver with more restricted playing rights than those enjoyed by members holding Diamond memberships.
47 The constitution provided for the transfer of memberships in accordance with cl 16. A person wishing to transfer a membership to another had to seek the approval of the Board which could give, or refuse to give, its approval. The Board was also bound by cl 16.4.1 which provided that:
Until such time that all of the Memberships have been issued, the Board will only nominate a Transferee in preference to Memberships not yet issued after the sale of the three unissued Memberships in respect of each notice served under clause 16.2, from the date such notice is received by the Board.
SLGC was entitled to a fee from the member transferring membership. The amount of that fee was to be determined by the Board provided it did not exceed 10% of the greater of following: the current membership fee payable for unissued memberships (or the last membership fee paid if all have been issued); or the market value of the membership as determined by the Board.
48 Membership sales did not improve. By the end of May 2000, 286 of 300 Diamond, 8 of 700 Gold and 6 of 700 Silver memberships had been sold.
49 The management of SLGC was changed at some time before 6 August 2001 and probably in 2000 so that its Manager became Mr Stephen White. Asset Solutions also engaged Australian Resort Management Pty Ltd (“ARM”) to manage SLGC and SLRA. ARM was effectively administered by Mr Head of Asset Solutions but day to day responsibility for Lakes and Clubs lay with its General Manager, Mr Anthony Gurry, and with Mr Stephen White, who had been appointed as Manager. New promotional strategies were implemented but sales did not improve and SLGC required continued financial support.
50 SLGC’s accounts were prepared by Mr Jim Hammer, who was SLGC’s Manager after Mr Stephen White resigned as Manager in November 2001. Mr Hammer reported to Mr Anthony Gurry. SLGC’s accounts were audited by Stannard Colbourn & Angelini. They were dealt with separately from those of Lakes and Clubs.
Loan agreement between SLRA and Lakes
51 On or about 18 August 2000 or some time later but certainly “after the advances to Residents Association for that matter, the golf club, reached a scary level, a concerning level”, Mr Kenneth Tan gave instructions to Maddocks to prepare a loan agreement between Lakes and SLRA. In that agreement, they acknowledged that Lakes had previously lent funds to SLRA for the purposes of the operation and management of the Common Property in the development and that it agreed to do so in the future. SLRA agreed to repay the sums borrowed with interest five years after the sums were advanced. That repayment day was repeated in a report prepared by Buck regarding the valuation of the memberships as at 1 July 2000. It reported that the proposed repayments would be made on the basis of SLGC’s capacity to pay. SLGC’s then current cash flow predictions as provided by Asset Solutions suggested that the first of the repayments could be made in 2006.
Loan agreement between SLGC and Lakes
52 On the basis of the evidence of Mr Tan, the Tribunal found that Lakes had intended to support SLGC initially but not indefinitely. Its intention had been to limit its operating subsidy to SLGC to an amount of $5 million. The final instalment of that amount was to be paid in the 2000/2001 income year.
53 At about the same time as Lakes entered the loan agreement with SLRA, it entered an agreement on similar terms with SLGC. Mr Kenneth Tan’s evidence, which the Tribunal accepted, was that:
The Investors of course were looking to maximise the overall return on their investment. They wholly owned all the entities undertaking the development, and while each existed separately in a legal sense, they were all inextricably linked and economically interdependent, and in effect comprised a single economic entity. We therefore decided to structure Lakes’ advances to the Golf Club as loans to preserve the possibility of repayment to Lakes on commercial terms in the future when the Golf Club had cleared its commitments.
54 In his oral evidence, Mr Kenneth Tan discussed the basis on which the agreement was prepared and entered. The following extracts represent his evidence:
[B]ecause it was important for us to try and capture what was already happening between the entities, in some form of referenceable document. … there ought to have been an overarching document to guide the transactions …
… I think that when we put this agreement together, it followed basic format for loan agreements. That includes provisions as to interests, as to time period on there …
… it is intended to have effect. It provides – it provides that over-arching structure.
… The ability of the golf club to repay the loan would not have come out of sales. It could, for example, have come out of an increase of public traffic. So long as the club could generate operating profits which is not inclusive of sale – the membership sales proceeds, then, yes, we would have attempted to call back the loan with interest.
Meeting of the investors on 6 August 2001
55 The Sanctuary Lakes project was discussed at a meeting of the investors on 6 August 2001. The investors questioned various aspects of the development including SLGC and SLRA. They queried costs and performance of the project generally. The minutes of the meeting record that three options were considered in broad terms by the investors. The first was to continue as things were but to target low debt, payment of low dividends or a mix of debt reduction and smaller dividends. The second was to sell down by selling the whole project, super lots or equity with the object of reducing liability. The third was a balanced strategy to reduce debt to a level of between $6 million to $10 million but yet retain a level of debt that was not detrimental to the project as a whole. Consideration was still to be given to the sale of super lots “as a backup plan”.
56 On the basis of Mr Kenneth Tan’s oral evidence, the Tribunal found that the investors were concerned to ensure that any changes in ownership did not create problems in the day to day operations of the project such as land sales, construction, the provision of services to residents and golf club members and the payment of trade creditors. Various offers came to be considered including one from Westbrook working with Mirvac and another from Stockland.
Ongoing funding issues for SLRA and SLGC in 2001 and 2002
57 By 19 November 2001, the number of memberships sold in SLGC numbered 289 (286 in May 2000) Diamond, 56 (8) Gold and 11 (6) Silver. Despite that, there were still concerns about the reliance placed by SLRA and SLGC on subsidies. Mr Gurry was concerned to provide certainty to their regular suppliers and to the Australian Taxation Office (“ATO”). Mr Gurry reported to Mr Kenneth Tan on the staffing changes and then advised that he had been spending most of his time on issues relating to SLGC and SLRA for three reasons:
* The concerns and unrest caused by the “selling due diligence process” which un-nerved residents and members.
* The need to work through a program to give more certainty in the subsidy scenario of the SLGC and SLRA as you discussed with Stephen Head.
* The continuing reform in culture and systems to reduce the subsidy reliance.
You would have seen the circular to you two weeks ago re the initiatives to implement and I am moving to implement once we receive the formal approval.
58 Mr Head expressed his concern about similar issues in his email to the directors of SLGC, SLRA, Mr Kenneth Tan, Mr Hammer and Mr Gurry on 28 February 2002. He had received a notice from the ATO demanding that he and the other directors of SLGC, personally pay its outstanding taxation liabilities. Mr Head attributed the problems of SLGC and SLRA to continual difficulties in forecasting the revenue they would generate. Those difficulties had, in turn, been caused by the developers not selling memberships and residents not building as quickly as forecast. Strategies had to be put in place, Mr Head continued, to ensure that both companies were solvent and trading lawfully, that certain persons were responsible for ensuring that was so and being accountable to the Board of each. Services should be contracted out, SLGC restructured as an unlisted public company so that its members become shareholders and have an investment, SLRA’s fees become payable regardless of when land is built upon and residents encouraged to use food and beverage outlets.
59 Mr Gurry developed these points in his email of 2 April 2002 to Mr Head, Mr Yuh Lin Lee, Mr Rennick, Mr Michael Tan and Mr Cheah Min Loong. He sought to achieve various aims including those of efficiencies and economies from the use of plant, equipment and labour, contribution by SLRA members to SLGC as they enjoyed amenities provided by SLGC other than the golf course, removal of reliance on Lakes to fund ongoing operating losses, SLRA and SLGC’s achieving solvency and SLGC’s offering investment grade products.
60 The proposal involved the formation of a new company to replace SLGC. Shares in the new company would be offered to existing members of SLGC in exchange for their current memberships, transfer of SLGC’s assets to a new unlisted public company, Sanctuary Lakes Club Pty Ltd (“SLCA”), cancellation of all loan agreements between SLGC and the developer in exchange for shares in SLCA and the reconstitution of SLGC as a golf club in the traditional sense with an elected committee and Captain. On the basis of the memberships purchased to that time, shares based on its holding 1,321 memberships would be issued to the developer and shares based on 434 memberships issued to existing members. Mr Gurry noted that PGA LINKS Pty Ltd (“PGA Links”), which is a management company jointly owned by the Professional Golfers Association of Australia and LINKS Group Holdings had agreed to facilitate the creation of SLCA at no cost to SLGC, SLRA or the developer.
61 Under the proposal, SLCA would become the operator and agent of SLRA. Changes would be made to the fee structure. The existing debt between SLRA and the developer would remain but future amounts would be paid by the developer as body corporate fees and be structured as tax deductible expenditure.
62 The new company, SLCA, would formally approach SLGC, SLRA and the developer and propose the issue of shares in SLCA to members of SLGC in exchange for all their current memberships, amendment of SLGC’s constitution to ensure that SLCA was either the sole member or all of SLGC’s assets were transferred to it and that SLGC be reconstituted as a golf club in the traditional sense. In addition, SLCA would propose:
Cancellation of all loan agreements between SLGC and the Developer in exchange for the issue of shares in SLCA (i.e.: a debt for equity swap).
63 In relation to SLRA, it was proposed that:
As part of the SLRA changes, it is proposed that the constitutional amendments will provide for the owner of the “undeveloped residential land” at Sanctuary Lakes Resort to abide by specific infrastructure development standards and contribute a “body corporate fee” in lieu of providing SLRA loans/subsidies. This will remove the ongoing legal obligations of the developer to fund operating deficits. …
The existing debt between SLRA and the Developer will remain. Future “body corporate fees”‘ paid by the developer will be structured as tax deductible expenditure of the Developer.
Sale of two parcels of land to Sunland
64 On 26 June 2002, Lakes and Clubs entered contracts with Marington Pty Ltd (“Marington”), which is one of the companies in the Sunland group of companies (“Sunland”) for the sale and purchase of parcels of land.
Deed of Arrangement between SLGC and Lakes
65 SLGC and Lakes entered a Deed of Arrangement. The copy of the document in the evidence before the Tribunal is undated. Its effective date, as prescribed in cl 1, is 1 September 2002. SLGC would issue 527 memberships (246 Gold and 281 Silver) under its constitution to Lakes in full satisfaction of the amount of $10,236,191.68 then owing under the Loan Agreement between them.
Board meeting of Holdings on 18 November 2002
66 On 18 November 2002, the Board of directors of Holdings met. They recorded that 400 memberships had been sold at that time. Of those, 295 were Diamond, 92 were Gold and 13 Silver. The Board expressed concern for the funding of the annual subscriptions due on those that had not been sold. It discussed whether they should be disposed of en bloc to a third party and noted a proposal by PGA Links that it settle the annual subscriptions on their behalf in exchange for their being able to dispose of the memberships at any price they deemed fit. Mr Cheah Min Loong and Mr Harry Tan had previously rejected this proposal. It considered leasing memberships with a view to the lessees purchasing memberships in the future. The Board considered a proposal to market the memberships and to commit an advertising budget to it and requested Mr Lee Yuh Lin to implement it on his return to Melbourne.
67 At the same meeting, the Board noted that the proposal to convert their memberships to shares had been presented to the members of the SLGC. The proposal had generally been well received. The Board also noted that the members of the SLGC were also told that:
[T]he said shares to be ‘paid’ to the Malaysian investors were accompanied with assurances that the investors will not wantonly dump these shares, thereby reducing the value of the memberships.
Kenneth Tan reported that, from the shareholders’/investors’ perspective, this conversion is beneficial as it severs the old relationship and moral obligation to provide subsidies. Post-conversion, the shareholders/investors will become mere members and be only responsible for the subscription of the following golf memberships:
Available memberships (and respective value) to be taken over by the shareholders:
| 5 Diamond | A$33,000 |
| 598 Gold | A$19,500 |
| 678 Silver | A$12,500 |
Deed of variation between SLGC and Clubs
68 The Deed of Variation executed by SLGC and Clubs on 30 June 2003 related to the management agreement they executed on 30 June 1999. It recited the terms of the earlier agreement and stated that the current level of membership and subscriptions was insufficient to meet the ongoing funding requirements of SLGC. As a consequence, SLGC had considered reducing the price of its memberships in order to attract additional members but had decided that would have an impact on the return ultimately made by Clubs. Therefore, the recital concluded, SLGC and Clubs had decided that SLGC would pay the fees payable to Clubs in full by issuing to it 768 memberships being 5 Diamond, 356 Gold and 407 Silver memberships.
Development Lease over remainder to Links
69 Mr Head is a director of Links. On 16 August 2002, Lakes and Clubs entered an agreement with Links. Lakes and Clubs agreed to lease to Links the land comprised in the project other than land in Stage 23 of the development, land subject to the sale to Sunland and land already sold in earlier developments. On the basis of a colour copy and insofar as it could be read, the Tribunal found that the land comprised land that had been designated as belonging to Stage 28 and bordering Stage 23 and extending south along the border of the land running along Skeleton Creek to its southern boundary. Although difficult to read, the Tribunal found that among the Stages included in that land were Stages 29, 30, 32 and 38. Some of them are bounded by the Lake and what appear to be Stages 42 and 43 protrude into that Lake. South of the Lake appear to be Stages that include Stages 11, 44 and 47.
70 Links was required to carry out the development works on the leased land in a manner generally consistent with the existing operation at the Sanctuary Lakes Resort. The development works comprised the creation of allotments and their subsequent sale. Links assumed all of Lakes’ and Clubs’ obligations in respect of any agreement under s 173 of the PE Act relating to the land insofar as it could be said that the agreement touches upon issues directly or indirectly relating to the works carried out by Links. It was required to use the land for the use specified in item 9 and, under item 7.3, was required to comply with all laws and any requirements of any authority in connection with the land and Links’ use and occupation of it.
71 Clause 9.1 permitted Links to deal with its interest in the land at its complete discretion including assigning the lease. As each allotment was sold, it was agreed that the consideration received represented consideration for the freehold and consideration for the benefit of the leased land attributable to that allotment. The consideration was apportioned so that $1.00 was attributed to the freehold and the balance to the assignment of the lease.
72 Links agreed to pay Lakes and Clubs rent in the manner specified in Clause 8 and a Lease Premium as specified in Annexure C. Annexure C provided that the Lease Premium was the sum of $28 million and Item 7 in the Schedule provided that the rental was $1.00 each year for 100 years. Links paid the Lease Premium in or about October 2002. Lakes also agreed to pay to the SLRA an annual sum calculated on the basis that it would pay $10,000 for each developable area of land (i.e. not that land set aside for lakes and other public services and amenities) that is still registered in the name of Lakes and Clubs and that is not yet the subject of an executed contract of sale.
73 Under the Development Lease, Links also agreed to undertake, at its own cost and expense, the Staged Works required for the settlement of various contracts of sale executed in respect of Stage 23 land and the Sunland land. Lakes and Clubs agreed that it would remit the first $7 million to Links, retain the next $24 million (which included $14 million) from the sale of the Sunland land and remit any further amounts received to Links as compensation for costs it incurred to complete the Staged Works. If sales were not to proceed at a pace that allowed Lakes and Clubs to be paid within 12 months of the commencement of the agreement, they could excise allotments to the value of the amount owed to it.
74 Mr Kenneth Tan’s evidence was that, although the Development Lease referred to the Sunland land, Links was never intended to undertake the development works. The sum of $7 million remitted to Links was intended to cover the cost of its developing Stage 23 and the sum of $24 million included the proceeds of $14 million from the sale to Sunland.
Mr Kenneth Tan’s notes of meeting with Links
75 Mr Kenneth Tan’s notes of his meeting with the Links Group on 2 May 2003 dealt with a number of subjects. Among them were those relating to the SLRA debt then in the order of $3.4 million, the Section 173 Agreement obligations, proposal to buy the SLGC memberships and the obligations to Melbourne Water with regard to the lake.
76 With regard to the SLRA debt of $3.4 million owed to Lakes, Mr Kenneth Tan noted:
- Gurrie advised that residents have raised concerns about indebtedness of SLRA to SL P/L
- Head opined that probability of repayment is very slim
- Exco will consider forgiving loans, subject to SLGC membership proposal from Head.
Proposal by Links to Lakes and Clubs on 7 May 2003
77 The proposal put by Links to Lakes and Clubs in a letter dated 7 May 2003 dealt with several matters: lease payments, SLGC memberships, club plant and equipment, outstanding civil and landscaping works, the Section 173 Agreement obligations, SLRA debt and documentation:
(1) It was noted that the Stage 23 lots should be ready for settlement by late May or early June. Links would forward the sum of $10 million to Lakes and Clubs from Stage 23 settlements, which would conclude Links’ major financial obligations to them in respect of the lease.
(2) Links would pay $1 million cash at the same time as Stage 23 settled and Lakes and Clubs would transfer all memberships to Links. At the same time, Lakes and Clubs would pay Links the total amount they then owed to SLGC for the annual subscriptions on the memberships. Links would assume responsibility for past, present and future payments of the annual subscriptions. Links would pay a further $1 million to Lakes and Clubs one year after it had received the memberships and another $1 million a year later than that.
(3) “You will pay us at the same time as Stage 23 settles $4.321 million … and we will then assume all your responsibilities for the construction and general installation of outstanding civil and landscaping works. …”
(4) When Stage 23 settled, Lakes and Clubs would pay Links a further $1.227 million and Links would assume full responsibility for their Section 173 Agreement obligations other than those relating to the first lake. Despite that, and on the understanding that it would not assume responsibility, Links agreed to assist Lakes and Clubs financially in respect of the rectification and improvement of the first lake if the works exceeded $1 million. Lakes and Clubs had set that amount aside in trust.
(5) “You will release the Residents’ Association from its obligations to repay to you the current debt. This release recognises the practical reality that the Association will not ever be in a position to repay. We understand it also creates a tax deduction for you”.
Meeting of Executive Committee of Lakes on 14 May 2003
78 Mr Cheah Min Loong and Mr Harry Tan were the members present at the meeting of the executive committee on 14 May 2003. Mr Kenneth Tan and Mr Tan Kuen Kuen were also present. The committee resolved to send copies of the minutes of this meeting and of the previous meeting on 22 April 2003 to the Investors by 19 May 2003.
79 Among the matters reviewed was the proposal that had been made by Links and that was dated 7 May 2003:
3. Proposal by Links
Item 1: Agreed with proposed lease payments of $10 million from Stage 23 settlements
Item 3: Lee Yuh Lin to pursue offer for construction equipment from Links.
Item 4: Further tidying up/explanations required for outstanding civil and landscaping works.
Item 5: Agreed to S 173 obligations of $1,275,800.
Item 6: Investors to decide later on the debts due from Resident Association. This item should be independent from ‘wrap up’ with Links.
Item 2: Golf Club Memberships - Noted that as at 31/3/2003 the unsold memberships comprise of 2 Diamond, 588 Gold and 697 Silver.
Action: Before Investors’ meeting on Monday, 19 May to determine a) how much is owing in subscriptions & b) how much is yet to be received for the sale of club membership which we can use to offset the subscription.
Meanwhile, to request for a higher consideration of $4.0 million for the unsold club membership
Action: Ken to draft reply for Mr Harry Tan to approve and to forward reply to Links on the same day of this meeting, based on the following:
To thank Stephen Head for his letter, to accept certain items, to concede to letting him have the maintenance equipment and to request for a higher value for golf membership. To inform that Resident Association debt be dealt with separately.
4. Deeds of Variation and Arrangement
In the Deed of Arrangement, to replace the section on golf membership with that narrated in the Deed of Variation.
Response by Mr Head
80 On 15 May 2003, Mr Head sent an email to Mr Harry Tan stating:
I have now read your May 14 response to my proposal. To assist things through (and make life easier for all of us), I accept your point in relation to the Golf Club membership payment. I therefore agree to the figure being $4 million over three years.
Please understand Harry, the increase in this payment now forms part of the “overall package” offer I have forwarded. Please try to explain to your Board that it is a package deal which means it will be very difficult to reconcile if it is separated into individual items. I would therefore urge the Board to accept the whole package to avoid us having to go back to the drawing board and reconsider individual items. …
(Emphasis in original.)
Supplementary agreement between Links and Lakes and Clubs
81 Links and Lakes and Clubs executed an agreement referring to their earlier Development Lease agreement and reciting that some matters had not been addressed in it (“Supplementary Agreement”). It bears the date “6/5/2003” and what appears to be initials appear below the “6”. The numbers “6” and “5” appear to be written over numbers “30” and “6” respectively.
82 Among the matters addressed in the Supplementary Agreement, was the obligation Links had assumed under the Development Lease agreement in relation to Lakes’ and Clubs’ obligations under the Section 173 Agreement. Those obligations were set out in cl 4.2 in relation to the land that was subject to the agreement. They reflect the obligations assumed by Lakes and Clubs when purchasing the land to undertake various works in relation to the wetlands and their maintenance, drainage, physical infrastructure, open space requirements and site rehabilitation works.
83 It was agreed between Lakes and Clubs and Links that:
5.2.1 Sanctuary Lakes and Sanctuary Clubs remain responsible for the obligations of the owner as per the specific obligations outlined in Clause 4.2.1 to 4.2.8 above up to the amount of $1,275,800.
5.2.2 the amount referred to in clause 5.2.1 shall be paid by Sanctuary Lakes and Sanctuary Clubs to Links on the balance of sale proceeds from the Stage 23 Land.
5.2.3 The parties acknowledge and agree that in addition to the amount referred to in clause 5.2.1 Maddocks shall hold the sum of $1,000,000 on behalf of Sanctuary Lakes and Sanctuary Clubs, which shall be applied at the direction of Links towards the satisfaction of the Sanctuary Lakes and Sanctuary Clubs obligations pursuant to the section 173 agreement, including but not limited to the ongoing maintenance requirements of Melbourne Water with respect to the Lake.
5.2.4 The balance of such monies referred to in clause 5.2.3 (if any) shall be released upon the issue of a Certificate of Completion of each of the items set out in clause 14 of the section 173 Agreement or upon confirmation by Links that the monies are no longer required to be held.
84 The Supplementary Agreement went on to provide that, on the payment of an Option fee of $1.00, Lakes and Clubs granted Links an option to purchase all residual land that was the subject of the lease. The terms and conditions of the sale were those set out in cl 8. No consideration other than the Option Fee was mentioned.
85 Clauses 14.5, 14.6 and 14.8 were amended by cl 10 of the Supplementary Agreement. Showing the original wording with the amendments in bold, it now reads:
14.5 In consideration for the payment of the Lease Premium the Landlord agrees that it will account to the Tenant for all proceeds in respect of the sale of the Allotments on any portion of the Land (including the Sunland Group Land and Stage 23 Land) and agrees to hold such proceeds on trust for the parties. The proceeds will be distributed in accordance with Clause 14.6.
14.6 The Tenant hereby agrees and undertakes at its own cost and expense to complete the Staged Works required for settlement of various contracts of sale executed in respect of the Stage 23 Land and the Sunland Group Land and the Landlord agrees that it will subject to clause 14.8 below remit the first $7 million of such proceeds in respect of such sales to the Tenant after which the Landlord shall retain absolutely for itself the next $24 million $10 million and thereafter any balance shall be remitted to the Tenant as compensation for costs incurred to complete the Staged Works. If the sales do not allow for the full payment to the Landlord of $24 million within 12 months of the Commencement of this agreement (shortfall) then the Landlord may at its absolute discretion excised from the Land the subject of this Lease a number of the unsold Allotments which have a value equal to the amount of the shortfall. Upon the excising of such Allotments the obligation to pay the shortfall will have been satisfied.
Where Allotments are chosen for excision from the Land the subject of this Lease by the Landlord in satisfaction of the shortfall the value of the Allotments for this purpose shall be based on price lists available to the general public at the material time less 10%.
14.7 It is expressly agreed by the parties that the formal letter of offer referred to in Clause 20 must contain provisions which will facilitate the transfer of the Allotments chosen by the Landlord free of all liens and encumbrances.
14.8 For the avoidance of doubt, in respect of the Sunland Group Land, it is expressly agreed that the amount up to $14 million shall be retained by the Landlord on settlement of the relevant contracts of sale and the Landlord is responsible for the costs on the creation of any titles created for the Sunland Group Land.”
86 With regard to SLGC, it was acknowledged that Lakes and Clubs held a large number of memberships. Lakes and Clubs agreed to consent to an amendment of the Constitution of SLGC so that no more than five memberships could be released or sold without the written approval of SLGC’s Board. They would direct their representative on SLGC’s Board to vote to approve the amendment. Lakes and Clubs would not sell the memberships they held to another developer without Links’ prior written approval.
Loose Ends Agreement
87 The recitals to what has been called the “Loose Ends Agreement” dated 30 June 2003 note that there has been a Development Lease and a Supplementary Agreement “to address matters not included in the Lease”. They continued:
Since the Supplementary Agreement was entered into further matters have arisen that require clarification and the parties have agreed to enter into this agreement to address these matters.
88 One of those matters related to the transfer of memberships held by Lakes and Clubs in SLGC in return for the sum of $4 million to be paid in accordance with cl 3.2. That provided that:
3.2.1 the sum of $1,000,000 shall be paid on the date Links receives $7m and Sanctuary Lakes received $10m from settlement of Stage 23 land at which time the memberships shall be transferred to Links;
3.2.2 the sum of $1,000,000 shall be paid not later than 12 months from the date upon which Links receives the memberships;
3.2.3 the sum of $1,000,000 shall be paid not later than … 24 months from the date upon which Links receives the memberships;
3.2.4 the remaining $1,000,000 shall be paid not later than 36 months after the date on which the memberships are received by Links.
89 For the purposes of clause 3, Links was deemed to have taken transfer of the memberships remaining unsold as at 1 May 2003. Links would assume all responsibilities for those memberships from that day. Lakes and Clubs would settle all amounts owed to SLGC in respect of annual subscriptions relating to those memberships for the period up to 30 April 2003.
90 Clause 6 of the Loose Ends Agreement dealt with s 173 obligations under the PE Act:
6.1 In accordance with clause 5.2 of the Supplementary Agreement, Sanctuary Lakes and Sanctuary Clubs agreed to remain responsible for the obligations of the owner pursuant to Section 173 Agreement up to the amount of $1,275,800. Payment of this amount is to be made from the proceeds of the settlement of Stage 23 land.
6.2 In exchange for Sanctuary Lakes’ and Sanctuary Clubs’ paying Links the amount referred to in clause 6.1, Links shall assume all of Sanctuary Lakes’ and Sanctuary Clubs’ obligations outlined in clause 4.2 of the Supplementary Agreement save and except for any obligations that relate to the rectification or improvement works including the ongoing maintenance requirements of Melbourne Water with respect to the Lake. The parties acknowledge in accordance with clause 5.2.3 of the Supplementary Agreement that Maddocks holds a sum of $1,000,000 to be applied towards the maintenance of the Lake.
6.3 Whilst the parties acknowledge that Sanctuary Lakes and Sanctuary Clubs remain responsible for maintenance of the Lake, Links agrees that it will assist Sanctuary Lakes and Sanctuary Clubs financially with such rectification works exceeds the amount held in trust referred to in clause 6.2.
6.4 Sanctuary Lakes and Sanctuary Clubs acknowledge that any financial assistance by Links is not to be construed in any way as Links assuming the responsibilities of Sanctuary Lakes and Sanctuary Clubs with respect to the Lake.
91 Clause 7 dealt with SLRA’s debt to Lakes with cl 7.2 providing that “Sanctuary Lakes agrees to forgive the debt”.
92 Clause 5 refers to the responsibilities of Lakes and Clubs under the Development Plan for the costs of Development Works outlined in Annexure A to the Loose Ends Agreement. Annexure A outlined work in Stages that were not the subject of the earlier Development Lease. Clause 5.2 stated that:
Links will assume the responsibility for the Development Works in exchange for payment of the sum of $4,134,000.00
93 Under cl 5.3, Lakes and Clubs were required to pay that sum to Links from the settlement proceeds from the Stage 23 land. On 29 August 2003, Links issued an invoice for that amount to Lakes.
Lakes’ records of loans to SLGC and SLRA
94 Lakes’ Statements of Financial Position for the income years ending 30 June 2002, 2003 and 2004 show the way in which it recorded the loans made to SLGC and SLRA in those years and in the previous 2001 income year. The relevant entries are made under “Receivables” under the general heading “Non Current Assets”:
| Year | Receivable | Note | Relevant text of Note | Balance Sheet |
| 2001 | $17,427,938 | 5 | “ … Included in the above are loans to Sanctuary Lakes Golf Club Ltd and Sanctuary Lakes Residents Association Ltd. Both loans are unsecured and interest at a rate of 7.5% per annum can be charged (albeit, to date, the same has not been recognised given the performance of those entities). The interest rate can be varied by the company by giving 60 days notice of its intention to do the same. … ” | |
| 2002 | $19,805,606 | 5 | ||
| 2003 | $8,052,393 | 5 | “Receivables Loan receivable links $1,627,800 | |
| 2004 | $12,237,737 | 5 | “ … Included in the above are loans to Sanctuary Lakes Club Ltd which can attract interest at a rate of 7.5% per annum (albeit, to date, the same has not been recognised given the performance of those entities). The interest rate can be varied by the company giving 60 days notice of its intention to do the same. … ” |
95 In a letter dated 21 July 2005, Bentleys mri (“Bentleys”), chartered accountants and business advisors, wrote to the ATO in response to correspondence from and a meeting with its officers. It dealt with the cost of goods sold by Lakes, being the sales by Stages of the development, and the cost of goods sold by SLGC, being the sale of memberships. Attached to its letter was a note relating to the loan and sale of memberships:
Losses on Sale of Land/Loans Forgiven
Amount as per Financial Statements 30 June 2003 $8,436,342
Being Cost of purchase of 527 SLGC Memberships 10,064,142
Less: Receipt for sale of Memberships 1,627,800
Net Tax Loss on Sale of Memberships $8,436,342
(1) Sanctuary Lakes in their pursuits of developing and selling Golf Course housing estates, took the economic decision to keep on making advances (as marketing/development costs) to Sanctuary Lakes Golf Club (“SLGC”) (an unrelated party) to keep the Club afloat as to be able to sell properties at a profit.
Costs were capitalised with a view to eventually collect [sic] these amounts once the Golf Club became profitable (refer Promissory Note).
Under the Deed of Arrangement between Sanctuary Lakes Club and Sanctuary Lakes (unrelated) Clause 2, Sanctuary Lakes was to issue Golf Club memberships in satisfaction for the release of SLGC from all liabilities. Therefore, the Loan Balance of $10,064,142 forms the cost of the Memberships purchased. These memberships were then sold to Links Sanctuary Lakes for $4,000,000. As at 30 June 2003, only $1,627,800 of this $4,000,000 had been received.
(2) In accordance with Clause 3, Agreement dated 2003, Sanctuary Lakes was to be paid 527/1295 of $4,000,000 (refer Clause 1 or [sic] Deed of Arrangement).
Year ending 30 June 2003, ie: 527/1295 x $4,000,000 = $1,627,800.
NB:
The loan write off should NOT have been disclosed as a Loan Forgiven.
96 The financial records that the Tribunal had do not disclose the advances being recorded as marketing costs at any relevant time. Mr Kenneth Tan confirmed that this was so.
Club’s records of dealings with SLGC
97 Clubs’ Financial Statements for the income years ending 30 June 2002, 2003 and 2004 show the way in which it recorded the loans to SLGC and the sale of SLGC memberships. The relevant entries are made under “Receivables” under the general headings “Current Assets” and “Non Current Assets”:
| Year | Receivables (Current Assets) | Receivables (Non Current Assets) | Note | Relevant text of entry or of Note to entry |
| 2001 | – | |||
| 2002 | 900,000 | – | Sales Receivables (Memberships) | |
| 2003 | Financial Statements for 2003 record $8,436,342 as “Forgiven Loan-Sanctuary Lakes Club Ltd | |||
| 2003 | 1,186,100 525,414 | 1,186,100 | Sale of Golf Course Memberships – Links Group Sales Receivables (Memberships) | |
| 2004 | 1,957,066 525,414 | – | 5 5 | Sale of Golf Course Memberships – Links Group Sales Receivables (Memberships) |
Issue 1: The Tribunal’s Findings, Reasons and Conclusion
98 At R [126] the Tribunal found:
Having regard to all of the material, I am not satisfied that the Deed of Arrangement was part of a broader transaction to enable the investors to divest themselves of responsibility for the project and pass it to Links. That transaction was to come later and it cannot affect the characterisation of the dealings involving the transfer of the memberships from SLGC to Lakes under the Deed of Arrangement.
99 At R [127] the Tribunal found:
The debt of $10,064,143.00 owed by SLGC to Lakes was an asset owned by Lakes. It exchanged that asset for a total of 527 memberships in SLGC as Maddocks wrote to the Commissioner in their letter dated 3 April 2006. Those memberships are also assets and the amount of the debt represented their cost. They were described by Bentleys as “goods” in their letter to the Commissioner dated 21 July 2005. As shown in the attachment to Bentleys’ letter [see [95] above], the Loan Balance of $10,064,142 formed the cost of the memberships. All that had changed was the form of the asset held by Lakes. It could no longer look to SLGC for repayment of a debt but, subject to the restrictions in SLGC's constitution, the memberships could be transferred to other persons.
100 The Tribunal made a number of other findings relevant to the purpose for which Lakes held the SLGC memberships:
(1) The minutes of the Board meeting of Holdings held on 18 November 2002 (see [66] above) reveal that the directors were not quite sure what to do with the memberships they had acquired effective 1 September 2002: R [128].
(2) Commitment of an advertising budget suggests that the decision was made to hold the memberships for sale. That view is supported by the evidence of Mr Kenneth Tan to that effect given in cross-examination. It is also supported by the spreadsheet that he prepared and is headed “Analysis of Anticipated Membership Sales and Subscriptions”: R [130].
(3) Holding the memberships for sale is also consistent with the nature of the project as a whole. Lakes was not established for the purpose of trading memberships but it was part of a corporate structure put in place to develop Sanctuary Lakes: R [131].
(4) The memberships remaining unsold at the conclusion of the year of income are not included in Lakes’ assets in the Balance Sheet. The Balance Sheet would appear to be incomplete in this regard but the Profit and Loss statement supports a finding that, at least in the year of income, Lakes treated the memberships as trading stock: R [133].
(5) Having regard to all of the material and of the findings the Tribunal made, the Tribunal was satisfied that Lakes held the memberships for the purpose of selling them. Sale of those memberships had not been part of their daily business to that point but it was part of the strategy engaged in by Holdings, Lakes and Clubs to bring the project at Sanctuary Lakes to completion: R [134].
101 The Tribunal reasoned that the fact that Lakes had not traded in memberships before it entered the Deed of Arrangement did not detract from its doing so after that time. That was the role it now had to play: R [134].
102 The Tribunal concluded that trading in memberships became part of Lakes’ ordinary course of business. They became its trading stock: R [134].
103 The Tribunal further concluded that in consequence of its conclusion in [102] above, s 70-25 of the 1997 Act meant that Lakes’ outgoing in acquiring the memberships cannot be regarded as an outgoing of capital or of a capital nature but more importantly, the amount of the deduction it may claim is regulated by Subdiv 70-B of the 1997 Act: R [135].
104 At this point, the Tribunal’s reasoning becomes difficult to understand. At R [135] it says:
[I]f Lakes is to claim the whole of the $10,236,191.68 as the outgoing attributable to its acquisition of the memberships, it and SLGC must have dealt with each other at arm's length.
This, no doubt, is said in recognition of the provisions of s 70-20 but apart from stating the obvious, namely, whether Lakes and SLGC dealt with each other at arm’s length “can only be determined after considering any connection between them and any other relevant circumstance”, the Tribunal does not proceed to make any finding on this issue. On the other hand, having regard to the reasoning and the conclusion that followed, one may infer that the Tribunal was of the view that Lakes and SLGC had not dealt with each other at arm’s length in relation to Lakes’ acquisition of the memberships.
105 The Tribunal proceeded to conclude that it was not satisfied what the market value of the memberships was; and it was certainly not satisfied that it was $10,236,191.68: R [138]–[140].
106 The Tribunal therefore concluded that Lakes had not discharged the onus it carried on this particular issue and its claim therefore failed: R [141].
Analysis and consideration of Issue 1
107 On the appeal, Lakes assailed the findings of the Tribunal at R [126] (see [98] above) as well as other findings at R [116] and [125]. It was contended that the findings at R [126] contained a number of errors. If that is so, then they were not errors of law.
108 On the other hand, there is no doubt that other findings and reasoning of the Tribunal on this issue did lead it into legal error. Specifically, its findings at R [128]–[134] (see [100] above) and its reasoning at R [134] (see [101] above) led it into error first, in its conclusion at [134] (see [102] above) that the memberships which Lakes acquired from SLGC became trading stock of part of the ordinary course of its business; second, in its consequential conclusion at R [135] (see [103] above) that s 70-25 of the 1997 Act denied Lakes’ outgoing in acquiring the memberships from being regarded as outgoing of capital, or of a capital nature; and third, its conclusion that the amount of the deduction it may claim was regulated by Subdiv 70-B of the 1997 Act.
109 Even if the memberships became trading stock as part of the ordinary course of Lakes’ business and, as indicated in [110] below, there is no evidence to suggest they did, by the Tribunal’s own finding they were not trading stock as part of the ordinary course of Lakes’ business at the time they were acquired. Lakes did not have such a business at that time. This is sufficient to identify legal error in the Tribunal’s reasons and conclusion going to the operation and effect of s 70-25, namely, it had no operation and effect to deny Lakes’ loss or outgoing in acquiring the memberships the character of an outgoing of capital, or of a capital nature.
110 Moreover, there was no evidence before the Tribunal, and certainly the Court was not taken to any, to enable a conclusion to be drawn that subsequent to their acquisition the memberships became the trading stock of a business of trading in such memberships carried on by Lakes. As was said in the plurality judgment in John v Commissioner of Taxation (1989) 166 CLR 417 at 429:
The definition looks to the nature of goods that may constitute trading stock and posits that they will constitute trading stock if acquired for any of the specified purposes, including sale. It presupposes that the person by whom they are produced, manufactured, acquired or purchased is or will be engaged in trade in those goods. But it does not render an enquiry into whether or not the person is or will be engaged in that trade irrelevant. A single transaction does not render a person a trader, although, of course, a single transaction may constitute an adventure in the nature of trade. Nor, we think, is a single item acquired for the purpose of manufacture, sale or exchange an item of trading stock, unless the purchaser is or will be engaged in trading goods of that nature. Thus it is relevant to inquire whether the person who acquires an item claimed to be trading stock is a trader in the sense that he is engaged or will be engaged in trading goods of the nature of the item acquired.
111 Once the deeming benefit of s 70-25 is taken away, then irrespective of how the transaction is characterised as a matter of fact, either as a net loss of $8,436,342 on the released debt, or a net loss of the same amount on sale of the memberships to Links, the loss is clearly a loss of capital, or of a capital nature. Apart from making a bald submission to the contrary in its written outline of submissions, Lakes did not argue otherwise.
112 If the Court hearing an appeal from the Tribunal finds an error of law in its reasons, but nevertheless considers that the decision was clearly correct on the material before the Tribunal, it is open to the Court to dismiss the appeal: see Morales v Minister for Immigration and Ethnic Affairs (1995) 60 FCR 550 at 560; Austin v Deputy Secretary, Attorney-General’s Department (1986) 12 FCR 22 at 26, 27; State Rail Authority of New South Wales v Collector of Customs (1991) 33 FCR 211 at 217.
113 The appeal on Issue 1 cannot be sustained.
Issue 3: The Tribunal’s Findings, Reasons and Conclusion
114 The Tribunal was not satisfied that the forgiveness of the SLRA debt of $3,410,252 was a condition of anything occurring and certainly not a condition of the subsequent agreements that were negotiated between Lakes and Clubs, on the one hand, and Links on the other: R [162].
115 The Tribunal found that there was no connection between Lakes incurring the loss when writing off the advances to SLRA and its gaining assessable income in the form of the Development Lease premium: R [162].
116 The Tribunal found it unnecessary to consider the Commissioner’s alternative submission that Lakes’ outgoing was a capital outgoing: R [162].
Analysis and consideration of Issue 3
117 Lakes assailed a number of findings of the Tribunal in relation to this issue at R [156], [157], [158], [160], [161] and [163] on the basis that they contained a number of errors. But if they do, they are errors of fact not errors of law.
118 The Tribunal seemed to be of the view that Lakes’ forgiveness of the SLRA debt amounted to no more than its writing off: see, for example, the title to Issue 3 after R [149] and R [162] where the words “forgiveness” and “writing off” are used interchangeably. That the writing off of a debt in a creditor’s books does not amount, in the absence of anything else, to a release or forgiveness of the debt, and that a debt forgiven or released cannot be written off because it no longer exists are propositions beyond argument: Point v Federal Commissioner of Taxation (1970) 119 CLR 453.
119 Assuming for present purposes that the SLRA debt was forgiven rather than merely written off, otherwise there would be no loss for Lakes to claim as an allowable deduction, it is clear that it is a loss and not an outgoing as intimated by the Tribunal at R [162]. Accepting for present purposes that the forgiveness of the SLRA debt occurred in the course of Lakes carrying on its business, it is, nevertheless, difficult to identify, on the evidence and the findings thereon, any relevant nexus between that business, irrespective of its scope, and the incurring of a loss by foregoing a debt to an unrelated company (SLRA was a company limited by guarantee).
120 But even if a relevant nexus can be identified, clearly it is a loss of capital or of a capital nature and not deductible under s 8-1.
121 The reasoning of the Tribunal on this issue may have been infected with legal error but as noted in [112] above, if the Court considers that the decision was clearly correct on the material before the Tribunal it is open to the Court to dismiss the appeal.
122 Lakes’ appeal on this Issue cannot be sustained.
Issue 4: The Tribunal’s Findings, Reasons and Conclusion
123 This issue is a timing issue and was put by the Tribunal, correctly in my view, in the following terms (at R [165]):
Lakes paid the sum of $4,134,000.00 to Links and it is clearly an outgoing for the purposes of s 8-1 of ITAA97 but the question is: when was the outgoing incurred? Did Lakes incur the outgoing on 30 June 2003 … or on 29 August 2003 when Links issued an invoice to Lakes for $4,134,000.00 “Representing fee for outstanding works pursuant to Clause 5.2 of the second Supplementary Agreement dated 30 June 2003” and Lakes paid it (the 2004 income year). The answer to the question depends upon the interpretation of the Loose Ends Agreement and not upon a commercial view of the matter.
124 The Tribunal reviewed the terms of cl 5 of the Loose Ends Agreement and observed (at R [166]):
Clause 5.1 acknowledges that Lakes and Clubs remain responsible for the cost of the Development Works. The Development Works are listed in Annexure A to the Loose Ends Agreement together with their cost estimate and comments. The list included all remaining civil works for Stages 25A, B, C and D together with work such as Sunland Boulevard, pedestrian bridge abutments for Stage 7, Skeleton Creek Treatment landscaping and Sanctuary Lakes Boulevard entry road works. Under cl 5.2, Links “will assume responsibility for the Development Works in exchange for the payment of the sum of $4,134,000.00” (emphasis added). Under cl 5.3, Lakes and Clubs “shall pay the sum referred to in clause 5.2 to Links from the settlement proceeds from the Stage 23 land”. (Emphasis added.)
125 The Tribunal found that the effect of these clauses was that Links did not assume responsibility for the Development Works until it received the money. In the meantime, Lakes and Clubs remained responsible for those works under the Development Plan. Clause 5.3 required Lakes and Clubs to pay the money from the settlement proceeds from the Stage 23 land. The Tribunal found that under the contract, they could not pay the money from any other source: R [167].
126 The Tribunal found that Lakes’ liability did not arise until it had sufficient proceeds from the sale of the Stage 23 land to pay the money: R[168].
127 The Tribunal also found that the Stage 23 proceeds referred to in the Loose Ends Agreement were not received until after 30 June 2003. Therefore, the Tribunal concluded, Lakes’ obligation to pay the amount of $4,134,000 did not arise in the year of income, but in the 2004 income year, and Lakes was therefore not entitled to claim the amount as a deduction in the year of income: R [171].
Analysis and consideration of Issue 4
128 Again, Lakes assailed a number of findings of the Tribunal in relation to this issue at R [165], [167] and [168] all of which went to the proper construction of the terms of the Loose Ends Agreement, in particular, cl 5. Lakes did not challenge the Tribunal’s finding at R [171] (see [127] above), that the proceeds from the settlement of the Stage 23 land were not received until after 30 June 2003.
129 Lakes’ argument was that it incurred the liability in the relevant sense when it entered into the Loose Ends Agreement on 30 June 2003. To the contrary, the Commissioner argued that no pecuniary liability was incurred by Lakes until it received the settlement proceeds from the Stage 23 land and that was in the 2004 income year; only then did an accrued liability or indebtedness come into existence.
130 The Tribunal came to the conclusion that, under the Loose Ends Agreement, receipt of sufficient proceeds from the settlement of the Stage 23 land not only determined when Lakes and Clubs had to pay the sum of $4,134,000 and the source from which the payment was to be made, but, in the circumstances, determined when the liability or obligation to make the payment came into existence; in other words, until sufficient proceeds from the settlement of the Stage 23 land had been received (and the finding that they were not received until after 30 January 2003 was not challenged), there was no liability or obligation under the Loose Ends Agreement to make the payment. In my view, that conclusion was undoubtedly open on the terms of cl 5 of the Loose Ends Agreement and is consistent with the reasoning and conclusion reached in a different factual context, but not sufficiently different to matter, in Federal Commissioner of Taxation v Malouf (2009) 174 FCR 581.
131 Lakes’ appeal on this Issue cannot be sustained.
Issue 5: The Tribunal’s Findings, Reasons and Conclusion
132 The Tribunal found that the Development Lease did not address Lakes’ obligations under s 173 of the PE Act: R [174].
133 The Tribunal found that Lakes’ obligations in this regard were addressed for the first time in the Supplementary Agreement: R [174].
134 The Tribunal observed that cl 5.2.1 states that Lakes and Clubs remain responsible for the obligations of the owner for those obligations specified in cl 4.2.1 to 4.2.8 of the agreement up to the amount of $1,275,800.00. Clause 4.2 specifies works such as wetland works, drainage works, public open space requirement works and site rehabilitation works and specifies the particular clause of the Section 173 Agreement setting out the obligations undertaken by Lakes and Clubs. Clause 5.2.2 provides that the amount of $1,275,800.00 will be paid to Links from the balance of sale proceeds from Stage 23 land: R [174].
135 The Tribunal found that at no time in the Supplementary Agreement is an obligation imposed upon, or does Links undertake, to perform the work necessary to fulfil the obligations of Lakes and Clubs under the Section 173 Agreement: R [174].
136 The Tribunal observed that cl 6.1 of the Loose Ends Agreement summarises Lakes’ and Clubs’ agreement to remain responsible for their obligations under the Section 173 Agreement up to the amount of $1,275,800.00 and that it then states that “[p]ayment of this amount is to be made from the proceeds of the settlement of Stage 23 land”. The Tribunal further observed that no reference is made to whom the payment is to be made but, reading the clause with cl 5.2.2 of the Supplementary Agreement, it must mean that the payment is to be made to Links: R [175].
137 The Tribunal further observed that cl 6.2 then moves to a subject not dealt with in the Supplementary Agreement. It reads:
In exchange for Sanctuary Lakes and Sanctuary Clubs paying Links the amount referred to in clause 6.1, Links shall assume all of Sanctuary Lakes’ and Sanctuary Clubs’ obligations outlined in clause 4.2 of the Supplementary Agreement save and except for any obligations that relate to the rectification or improvement works including the ongoing maintenance requirements of Melbourne Water with respect to the Lake. The parties acknowledge in accordance with clause 5.2.3 of the Supplementary Agreement that Maddocks holds a sum of $1,000,000 to be applied towards the maintenance of the Lake.
(Emphasis added.)
138 The Tribunal found that the clear meaning of the clause is that Links does not acquire any obligations in relation to Lakes’ s 173 obligations until it is paid the sum of $1,275,800.00. That did not occur until some time after Links issued an invoice for that amount on 29 August 2003 and so in the 2004 income year: R [176].
139 The Tribunal further observed that if it be thought that the obligation arose upon Lakes’ receiving the proceeds from Stage 23, it repeated its earlier conclusion that it was not satisfied that it did so in the year of income. Rather, it arose in the 2004 income year.
Analysis and consideration of Issue 5
140 As noted at [128] above, the observation and conclusion in [139] above is not challenged on appeal.
141 For the reasons given in relation to Issue 4, Lakes incurred no liability or obligation to pay Links until sufficient proceeds were received from settlement of the Stage 23 land and that did not occur until after the end of the year of income.
142 The appeal on this Issue also cannot be sustained.
Penalties
Commissioner’s Assessments
143 The Commissioner assessed Lakes to a 25% administrative penalty on two bases:
(1) With respect to Issues 1, 3 and 5; on the basis that Lakes, or its tax agent, failed to take reasonable care in relation to the filing of the relevant tax returns: see s 284-75(1) and s 284-90(1) Item 3 of Sch 1, TAA 1953; alternatively
(2) with respect to Issues 3 and 5; on the basis that Lakes had taken a position that was not reasonably arguable: see s 284-75(2) and s 284-90(1) Item 4 of Sch 1, TAA 1953.
The Tribunal’s consideration of failure to take reasonable care
144 The Tribunal affirmed the Commissioner’s objection decision in respect of the penalties imposed for failure to take reasonable care: R [207]. The process of consideration adopted by the Tribunal in making that decision was as follows:
(1) First, the Tribunal noted that Lakes bore the burden of proving, according to s 14ZZK of the TAA 1953, that the Commissioner’s assessment of penalties was excessive: R [178];
(2) secondly, the Tribunal considered the law relating to false or misleading statements (R [183]–[188]), concluding that Lakes’ claims for deductions in relation to the Penalty Issues were false in material particulars and that Lakes was liable to an administrative penalty under s 284-75(1): R [189];
(3) thirdly, the Tribunal considered the law relating to the quantification of the base penalty amount under s 284-90: R [197]–[202]. The Tribunal rejected Lakes’ submission that its audited financial statements were determinative of the question of whether reasonable care had been taken in the claiming of a deduction: R [206]. The Tribunal found that Lakes had “not produced any evidence from the persons to whom it referred” in its submission and objection as having audited and maintained Lakes’ accounting systems (R [203], [204]), and that accordingly, the Tribunal was unable to make any findings relevant to the application of s 284-90;
(4) lastly, the Tribunal concluded that “in the absence of any evidence regarding any particular steps that Lakes took to ensure that it did not make a statement false in a material particular”, the penalties for failure to take reasonable care should be affirmed: R [207].
The Tribunal’s consideration of “not reasonably arguable” statements
145 In respect of Issue 5, the Tribunal considered (at R [196]) that:
(1) Having regard to Commissioner of Taxation v Woolcoombers (1993) 47 FCR 561, viewed objectively, there was room for “rational argument” in relation to Issue 5;
(2) accordingly, Lakes had not made a statement that was not reasonably arguable within the meaning of s 284-75(2);
(3) the Tribunal’s conclusion in relation to this Issue made no practical difference to the outcome as Lakes was already liable to a penalty under s 284-75(1).
146 In respect of Issue 3, the Tribunal overlooked the Commissioner’s alternative basis for the imposition of a penalty under s 284-75(2). While the Commissioner maintained his position that Lakes’ position was not reasonably arguable, he did not contend in his appeal that the Tribunal committed an error of law as such a finding would have no practical consequences.
147 Lakes contended that the Tribunal erred in failing to consider whether its position on Issue 3 was reasonably arguable. Lakes submitted that it was reasonably arguable and that being the case, it necessarily follows that Lakes (and its tax agent) must have taken reasonable care (in filing the relevant return) with respect to both Issues 3 and 5, citing the first sentence from Hill J’s principle #6 in Walstern Pty Ltd v Federal Commissioner of Taxation (2003) 138 FCR 1 at [108].
148 Lakes also contended that it was “entitled” to have the Tribunal consider whether the fact it had a reasonably arguable position meant it had taken reasonable care.
Analysis and consideration of imposition of penalties
149 I agree with the Tribunal’s affirmation of the Commissioner’s objection decision in respect of the penalties imposed for failure to take reasonable care and its process of consideration to that end outlined in (1) to (3) in [144] above.
150 I reject Lakes’ contention that it necessarily follows that, a finding that its position was reasonably arguable, Lakes (and its tax agent) must have taken reasonable care in filing the relevant return. Similar arguments have been rejected in a number of recent decisions which have held that having a reasonably arguable position and taking reasonable care are independent standards: Federal Commissioner of Taxation v Traviati (2012) 205 FCR 136 at [10]–[22]; Pratt Holdings Ltd v Federal Commissioner of Taxation [2012] FCA 1075 at [167].
151 Similarly, I reject Lakes’ contention in [148] above. If having a reasonably arguable position and taking reasonable care are independent standards, there is no reason to suppose that the legal test for the application of the reasonable care penalty must include a consideration of whether the taxpayer has a reasonably arguable position.
Conclusion
152 For these reasons, I am of the view that Lakes’ appeal in VID 520 of 2012 should be dismissed with costs.
153 For the reasons given by Griffiths J, the Commissioner’s appeal in VID 521 of 2012 must be dismissed with costs.
| I certify that the preceding one hundred and fifty-three (153) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. |
Associate:
| IN THE FEDERAL COURT OF AUSTRALIA | |
| victoria DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 520 of 2012 |
| ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL |
| BETWEEN: | SANCTUARY LAKES PTY LTD Applicant |
| AND: | COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent |
| IN THE FEDERAL COURT OF AUSTRALIA | |
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 521 of 2012 |
| ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL |
| BETWEEN: | COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Applicant |
| AND: | SANCTUARY LAKES PTY LTD Respondent |
| JUDGES: | EDMONDS, GREENWOOD & GRIFFITHS JJ |
| DATE: | 24 MAY 2013 |
| PLACE: | sydney (heard in mELBOURNe) |
REASONS FOR JUDGMENT
GREENWOOD J:
154 I have had the benefit of reading in draft the reasons for judgment of Edmonds J. I agree with his Honour that the appeal by Sanctuary Lakes is to be dismissed for the reasons identified by his Honour.
155 I have also had the benefit of reading in draft the reasons for judgment of Griffiths J (with which Edmonds J agrees) in relation to the Commissioner’s appeal concerning the Commissioner’s challenge to the Administrative Appeals Tribunal’s (the “Tribunal”) exercise of the discretionary power of remittal conferred under s 298-20 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the “Administration Act”). I agree with the conclusion reached by Griffiths J that the Tribunal, in exercising the discretion to remit the penalty imposed upon the taxpayer by s 284-75(1) of Schedule 1 and calculated (as to the amount of the penalty) under s 284-85(1) and s 284-90(1) of Schedule 1, did not take into account an “irrelevant” consideration.
156 The consideration said by the Commissioner to be irrelevant to the exercise of the discretion to remit all or a part of the penalty imposed upon Sanctuary Lakes by operation of the Administration Act itself (by reason of Sanctuary Lakes failing, either by itself or by its agent, to take “reasonable care” to comply with a taxation law thus resulting in a “shortfall amount” as defined in Schedule 1), was the consideration that the taxpayer’s claim to a deduction of $1,275,800.00 in the 2003 income tax year was nevertheless “reasonably arguable”. This claim is described and discussed in the Tribunal’s reasons as the “Issue 5” claim (“Issue 5”).
157 For my part, I accept that having regard to the broad terms in which the discretion is conferred under s 298-20 of Schedule 1 of the Administration Act, so as to confer a great degree of flexibility upon the Commissioner (and in consequence, the Tribunal) in taking into account whatever circumstances may be relevant to the exercise of the discretion having regard to the particular Divisional and sub-Divisional penalty regime under Part 4-25 of the Administration Act engaging s 298-20 of Schedule 1, the consideration that the taxpayer ultimately advanced a “reasonably arguable” claim to a deduction is not, at least, an irrelevant consideration. It might be weighed in the balance, among other considerations, in exercising the discretion under s 298-20 of Schedule 1 notwithstanding that the conduct of the taxpayer resulting in the shortfall amount (and giving rise to the 25% penalty of $89,687.00) was, as found, a failure to take reasonable care in making a statement to the Commissioner as contemplated by s 284-75(1) which was “false or misleading in a material particular”.
158 However, in my view, the exercise of the discretion by the Tribunal to remit the penalty in relation to Issue 5 miscarried under the general law either because the Tribunal, having regard to the exposed reasons, asked itself the wrong question in exercising the discretion or because it failed to properly consider and apply those particular elements of the statutory penalty scheme under the relevant Division of Part 4-25 of Schedule 1 to the Administration Act engaging the exercise of the discretion under s 298-20(1), in the sense contemplated in Craig v South Australia (1995) 184 CLR 163 at 179, by the Court, and Minister for Immigration v Yusuf (2001) 206 CLR 323 at 351 [82], McHugh, Gummow and Hayne JJ.
159 However, the Commissioner did not frame the grounds of appeal on this footing.
160 The Commissioner’s contention is simply, in effect, that the Tribunal exceeded the limits of the power conferred under s 298-20 of Schedule 1 by taking into account an irrelevant consideration consisting of the circumstance that the claim made by the taxpayer was reasonably arguable (apart from the Commissioner’s entirely separate second ground of appeal). It may be that the substance of the ground however is directed to the considerations that lead me to the conclusion that the exercise of the power conferred by s 298-20(1) miscarried. In principle however, the Commissioner ought to be confined to the way in which he has chosen to expressly frame ground 1.
161 However, the conclusion I have reached leads to another difficulty. If the Tribunal exceeded the limits of the power to remit the penalty for the reasons identified at [158] of these reasons and otherwise developed later in these reasons, the remittal of the penalty concerning Issue 5 to zero was and remains beyond power. It is a nullity. Since the question of law of whether the exercise of the discretion went beyond the limits of the power, albeit on the narrow ground of taking into account an irrelevant consideration, was agitated in the Commissioner’s appeal, it seems to me that the Tribunal’s decision on remittal cannot be allowed to stand as a continuing part of the Tribunal’s administrative decision without remedial intervention in the supervision of the exercise of the power.
162 It is now necessary to say some things about the statutory scheme and the reasons for the view I have formed that the exercise of the discretion by the Tribunal exceeded the limits of the power conferred by s 298-20 of the Administration Act.
Part 4-25 and the Divisions of that Part – Division 284
163 Part 4-25 of the Administration Act deals with the topic of “Charges and Civil Penalties for Failing to Meeting Obligations”. Part 4-25 is comprised of four Divisions, namely, Divisions 284, 286, 288 and 298.
164 Division 284 is concerned with “Administrative penalties for statements, unarguable positions and schemes”. Subdivision A of Division 284 sets out a number of general provisions and, in particular, the object of the Division (s 284-10); a definition of when a matter is “reasonably arguable” (s 284-15); the application of the Division to trusts and partnerships (s 284-30 and s 284-35); and the application of the Division to statements made orally or in a document or in any other way for a purpose connected with a taxation law, and statements made in an approved form by the taxpayer’s agent as if those statements had been made by the taxpayer (s 284-20 and s 284-25).
165 The object of Division 284 is to provide a uniform administrative penalty regime for all taxation laws to enable administrative penalties to apply to entities that fail to meet their obligations under those laws in relation to making false or misleading statements, taking positions that are not reasonably arguable, entering into schemes, refusing to provide documents to the Commissioner and disregarding private rulings. Later Divisions and Subdivisions of Part 4-25 impose penalties, by operation of the Administration Act, in relation to conduct falling within those categories.
166 A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is as likely to be correct as incorrect, or is more likely to be correct than incorrect (s 284-15(1)).
167 The section is in these terms:
284-15 WHEN A MATTER IS REASONABLY ARGUABLE
284-15(1) A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is as likely to be correct as incorrect, or is more likely to be correct than incorrect.
284-15(2) To the extent that a matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, had the Commissioner exercised the discretion in the way assumed, a court would be as likely as not to decide that the exercise of the discretion was in accordance with law.
284-15(3) Without limiting subsection (1) these authorities are relevant:
(a) a *taxation law;
(b) material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901;
(c) a decision of a court (whether or not an Australian court), the *AAT or a Board of Review;
(d) a public ruling within the meaning of Part IVAAA.
168 Subdivision B of Division 284 is the part of Division 284 particularly relevant in the present appeals.
169 Section 284-75(1) provides (and I will use the term “taxpayer”) that a taxpayer is liable to an administrative penalty if the taxpayer or the taxpayer’s agent makes a statement, relevantly, to the Commissioner; and the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and the taxpayer has a shortfall amount as a result of the statement.
170 Section 284-75(2) is not concerned with statements which are false or misleading in a material particular but addresses the making of a statement to the Commissioner in circumstances where the taxpayer has treated an income tax law as applying to a matter, or identical matters, in a particular way that was not reasonably arguable; and, the taxpayer has a shortfall amount as a result of the statement; and, the shortfall amount is greater than the statutory threshold, namely, more than the greater of $10,000 or 1% of the income tax payable by the taxpayer for the income year.
171 Section 284-75(3) represents a further pathway to a liability to an administrative penalty. It addresses a failure by a taxpayer to give a return, notice or other document to the Commissioner by a required date in circumstances where the document is necessary for the Commissioner to determine a tax-related liability of the taxpayer; and the Commissioner determines the tax-related liability without the assistance of the document.
172 Section 284-75(4) is concerned with a liability to an administrative penalty in circumstances where a private ruling has been made about the way in which a taxation law applies to the taxpayer; and after the ruling was made, the taxpayer makes a statement to the Commissioner treating the relevant taxation law as applying in a different way; and the taxpayer has a shortfall amount as a result of the statement.
173 Each of these four subsections of s 284-75 establish a liability in a taxpayer to an administrative penalty.
174 For the sake of completeness, the two particular subsections of s 284-75 relevant to the Tribunal’s decision are set out below:
SECTION 284-75 LIABILITY TO PENALTY
284-75(1) You are liable to an administrative penalty if:
(a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law; and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
(c) you have a *shortfall amount as a result of the statement.
284-75(2) You are liable to an administrative penalty if:
(a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under an *income tax law; and
(b) in the statement, you or your agent treated an *income tax law as applying to a matter or identical matters in a particular way that was not *reasonably arguable; and
(c) you have a *shortfall amount as a result of the statement; and
(d) item 4, 5 or 6 of the table in subsection 284-90(1) applies to you.
[terms marked with an * have a defined meaning]
Shortfall amount
175 Section 284-80 of Schedule 1 provides that a taxpayer has a shortfall amount if an item in the table contained within s 284-80(1) applies to the taxpayer. The shortfall amount is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been due to the particular conduct of the taxpayer having regard to any one of the six items that apply to the taxpayer. Item 1, for example, provides that a taxpayer has a shortfall amount in circumstances where a tax-related liability of the taxpayer for an accounting period, worked out on the basis of a statement made to the Commissioner, is less than it would be if the statement were not false or misleading. Item 2 provides that a taxpayer has a shortfall amount in circumstances where an amount the Commissioner must pay or credit to the taxpayer is more than it would be if the statement were not false or misleading.
176 Item 3 provides that a taxpayer has a shortfall amount in circumstances where a tax-related liability of the taxpayer for an accounting period, worked out on the basis of a statement, is less than it would be if the statement did not treat an income tax law as applying in a way that was not reasonably arguable and Item 4 contemplates an amount that the Commissioner must pay or credit to a taxpayer is more than it would be if the statement did not treat an income tax law as applying in a way that was not reasonably arguable.
The base penalty amount
177 Assuming a liability arises under s 284-75 having regard to a shortfall amount, the amount of the penalty imposed upon the taxpayer by the Act must be calculated. Section 284-85(1) provides for the working out of a “base penalty amount” under s 284-90(1). Section 284-90(1) provides for a base penalty amount calculated as a percentage of the taxpayer’s shortfall amount by reference to categories of conduct set out in a table within s 284-90(1). For example, if the taxpayer’s shortfall amount (or part of it) results from intentional disregard of a taxation law by the taxpayer or the taxpayer’s agent, the base penalty amount is 75% of the shortfall amount or the relevant part (Item 1 of the table).
178 If the shortfall amount (or a part of it) results from recklessness by the taxpayer or the taxpayer’s agent as to the operation of a taxation law, the base penalty amount is 50% of the shortfall amount or the relevant part (Item 2 of the table).
179 If the shortfall amount (or the relevant part) results from a failure by the taxpayer or the taxpayer’s agent to take reasonable care to comply with a taxation law, the base penalty amount is 25% of the shortfall amount or the relevant part (Item 3 of the table).
180 If the shortfall amount (or the relevant part) results from the taxpayer or the taxpayer’s agent treating an income tax law as applying to a matter in a particular way that was not reasonably arguable and the amount is more than the statutory threshold as earlier mentioned at [170] of these reasons, the base penalty amount is 25% of the shortfall amount or the relevant part (Item 4 of the table).
181 For the sake of completeness, Items 1, 2, 3 and 4 are set out below:
SECTION 284-90 BASE PENALTY AMOUNT
284-90(1) The base penalty amount under this Subdivision is worked out using this table:
| Base penalty amount | ||
| Item | In this situation: | The base penalty amount is: |
| 1 | Your *shortfall amount or part of it resulted from intentional disregard of a *taxation law by you or your agent | 75% of your *shortfall amount or part |
| 2 | Your *shortfall amount or part of it resulted from recklessness by you or your agent as to the operation of a *taxation law | 50% of your *shortfall amount or part |
| 3 | Your *shortfall amount or part of it resulted from a failure by you or your agent to take reasonable care to comply with a *taxation law | 25% of your *shortfall amount or part |
| 4 | Your *shortfall amount or part of it resulted from you or your agent treating an *income tax law as applying to a matter or identical matters in a particular way that was not *reasonably arguable, and that amount is more than the greater of $10,000 or 1% of the income tax payable by you for the income year, worked out on the basis of your *income tax return | 25% of your *shortfall amount or part |
182 The remaining Items within the table in s 284-90(1) deal with other descriptions of conduct and provide for the calculation of a penalty based upon the prescribed percentage of the shortfall amount. Section 284-90(2) provides that if two or more items in the table apply to the taxpayer for a shortfall amount or a part of it and one of them produces a greater base penalty amount than any of the others, that item is to be used.
183 Subdivision C of Division 284 provides for a liability in a taxpayer to an administrative penalty in relation to the getting of a scheme benefit from a scheme. Similarly, Subdivision C provides for integers giving rise to a liability and the calculation of the amount of a penalty by reference to a base penalty amount. It is not necessary to identify all the content of Subdivision C.
184 Subdivision D provides for exceptions which apply to the penalty regime arising under Subdivisions B and C. Section 284-215(2) provides that for the purpose of determining whether a taxpayer is liable to an administrative penalty, the taxpayer does “not have a shortfall amount” as a result of a statement that is “false or misleading in a material particular” to the extent that the taxpayer or the taxpayer’s agent “took reasonable care in making the statement”. Since, in those circumstances, the taxpayer does not have a “shortfall amount”, s 284-75(1)(c) is not satisfied and thus no liability would arise at all, for the purposes of s 284-75(1).
185 Section 284-215(1) provides that if a taxpayer would, apart from the subsection, have a shortfall amount for an accounting period and the shortfall amount (or a part of it) is caused by the taxpayer or the taxpayer’s agent treating a taxation law as applying in a particular way, and that way agrees with advice given by the Commissioner, general administrative practice under the relevant taxation law, or a statement in a publication approved in writing by the Commissioner, the taxpayer’s shortfall amount is reduced to the extent that it was caused by that treatment.
186 The point of s 284-215 in Subdivision D therefore is that it creates an exception from liability to penalty in one case and a reduction in the amount of the taxpayer’s shortfall amount in another case, as those subsections apply according to their terms. Two things that the Commonwealth Parliament has not done within the exception subdivision are these. First, the Parliament has not said that for the purposes of determining whether a taxpayer is liable to an administrative penalty, the taxpayer does not have a shortfall amount as a result of a statement that is false or misleading in a material particular in circumstances where the taxpayer failed to take reasonable care in making the statement but nevertheless ultimately adopted a position in making a claim under a relevant taxation law that, in any event, is reasonably arguable. Secondly, the Parliament has not said, as an alternative to an exception from liability, that in such circumstances the taxpayer’s shortfall amount is to be reduced in whole or in part on the footing that the position ultimately adopted by the taxpayer is shown to be reasonably arguable at the time a claim is made.
187 The base penalty amount might be susceptible of an increase under s 284-220 or a reduction of the amount under s 284-225. The circumstances in which the base penalty amount might be reduced are these:
SECTION 284-225 REDUCTION OF BASE PENALTY AMOUNT
284-225(1) The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced by 20% if:
(a) the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; and
(b) after that time, you voluntarily tell the Commissioner, in the *approved form, about the shortfall or the part of it; and
(c) telling the Commissioner can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the audit.
284-225(2) The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced under subsection (3) or (4) if you voluntarily tell the Commissioner, in the *approved form, about the shortfall amount or the part of it before the earlier of:
(a) the day the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; or
(b) if the Commissioner makes a public statement requesting entities to make a voluntary disclosure by a particular day about a *scheme or transaction that applies to your financial affairs – that day.
284-225(3) The *base penalty amount for your *shortfall amount, or for part of it, is:
(a) reduced by 80% if the shortfall amount, or the part of, it is $1,000 or more; or
(b) reduced to nil if the shortfall amount, or the part of it, is less than $1,000.
284-225(4) The *base penalty amount for your *scheme shortfall amount, or for part of it, is reduced by 80%.
284-225(5) If you voluntarily tell the Commissioner, in the *approved form, about your *shortfall amount or *scheme shortfall amount, or part of it, after the Commissioner tells you that a *tax audit is to be conducted of your financial affairs, the Commissioner may treat you as having done so before being told about the audit if the Commissioner considers it appropriate to do so in the circumstances.
Division 286
188 Division 286 addresses the topic of “Penalties for failing to lodge documents on time”. The object of Division 286 is to provide a uniform administrative penalty regime to enable administrative penalties to apply for failure to give returns, notices, statements or other documents on time. The Division sets out the circumstances giving rise to a liability to penalty; the method of calculating the amount of the penalty; and the circumstances in which the base penalty is multiplied by either a factor of two or four according to the terms of the particular provisions.
Division 288
189 Division 288 provides for a liability to an administrative penalty in relation to a failure to comply with “Miscellaneous administrative matters”. They include a liability to penalty for matters such as non-electronic notifications required to be given to the Commissioner; a failure to keep or retain records; a failure to retain or produce declarations; a failure to issue a tax invoice or adjustment note and other failures to discharge particular obligations cast upon a person by a relevant taxation law.
Division 298
190 Division 298 provides for “Machinery provisions for civil penalties”.
191 The Division applies if an administrative penalty is imposed on an entity by a Division of Part 4-25 or by Subdivision 162-C of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the “GST Act”). Leaving aside for the moment the application of the Division to a penalty imposed by the GST Act, the liability to administrative penalty arises under the Divisions of the Administration Act and the method of determining the amount of the penalty is also determined by the Divisions of Part 4-25 of the Administration Act. In determining whether a taxpayer is liable to a penalty or in identifying the amount of a penalty, no discretion or election is exercised by the Commissioner. The taxpayer’s liability to penalty and the amount of the penalty have been determined by the Parliament by operation of the Administration Act itself. Under s 298-30(1), the Commissioner, however, must make an assessment of the amount of the administrative penalty under Division 284 of the Administration Act. Under s 298-10, the Commissioner must give written notice to the entity of the entity’s liability to pay a penalty imposed under a Division of Part 4-25 of the Administration Act. The penalty becomes due for payment on the day specified in the notice.
192 Section 298-20 addresses the topic of “Remission of Penalty”. It applies to each penalty arising under each of the penalty regimes under Part 4-25. In order to provide the Commissioner with the flexibility necessary to determine the circumstances informing the exercise of the discretion to remit a penalty imposed under a Division of Part 4-25, s 298-20(1) simply provides that the Commissioner “may remit all or a part of the penalty”. Section 298-20 does not provide for any considerations that must be taken into account in the exercise of the discretion to remit all or a part of the penalty. For the sake of completeness, s 298-20 is set out below:
SECTION 298-20 REMISSION OF PENALTY
298-20(1) The Commissioner may remit all or a part of the penalty.
298-20(2) If the Commissioner decides:
(a) not to remit the penalty; or
(b) to remit only part of the penalty;
the Commissioner must give written notice of the decision to the entity.
298-20(3) If:
(a) the Commissioner refuses to any extent to remit an amount of penalty; and
(b) the amount of penalty payable after the refusal is more than 2 penalty units; and
Note: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit.
(c) the entity is dissatisfied with the decision;
the entity may object against the decision in the manner set out in Part IVC.
193 The discretion conferred by s 298-20(1) is unconstrained, according to its terms. It must, however, be exercised for a proper purpose; in accordance with the objects of the Administration Act; and according to law. Before returning to aspects of s 298-20, one further aspect of the Administration Act should be noted.
194 The Part of the Administration Act immediately following Part 4-25 is Part 4-50. Part 4-50 confers a power on the Commissioner to release particular classes of taxpayers from particular taxation liabilities. There are five classes of liabilities to which the release power relates and in respect of some of those classes of liabilities, the Commissioner has a power to release a taxpayer from a penalty under s 163A of the Income Tax Assessment Act 1936 (Cth). The particular taxpayers in respect of which the release power is conferred are either individuals or the trustee of the estate of a deceased person. The Parliament has not conferred a power on the Commissioner either within Part 4-25 or Part 4-50 to release a taxpayer from a liability to penalty arising under any of the Divisions of Part 4-25.
195 It can be seen from the scheme adopted by the Administration Act for the determination of an administrative penalty, that a number of concepts are embodied in the statutory arrangements. Part 4-25 provides for the integers which give rise to a liability in a taxpayer to an administrative penalty and the method of calculation of the amount of that penalty. Part 4-25 contemplates exceptions either from a liability in some cases or the reduction of the amount of a liability in another case. Part 4-25 provides for the remission of a penalty and Part 4-50 contemplates circumstances in which the Commissioner is conferred with a power to release particular taxpayers from particular classes of liabilities.
196 Section 298-20(1) confers a power on the Commissioner to remit which is engaged (or applies) “if an administrative penalty is imposed on an entity by another Division in this Part (s 298-5(a)), leaving aside for present purposes a penalty imposed by Subdivision 162-C of the GST Act) and once engaged, the Commissioner “may remit all or a part of the penalty” [emphasis added]. The starting point in the exercise of the power conferred by s 298-20(1) to remit the penalty is to identify the particular Division (or Subdivision) of Part 4-25 (in these appeals Subdivision 284-B) and the relevant integers by which the penalty “is imposed on an entity”. At [185], the Tribunal said this as to the Issue 5 claim to a deduction (among other claims):
… I have also decided that Lakes’ statements to the Commissioner … when claiming deductions were wrong and so false within the meaning of s 284-75(1) of the [Administration Act].
197 At [189], the Tribunal said this in relation to Issue 5 (among other claims):
On the view that I have taken, Lakes’ claim for deductions in relation to Issues 1, 2, 3 and 5 were wrongly made. Therefore, its claim for deductions were made on an incorrect understanding of the law and so on the basis of false statements. Each of those statements had a significant impact upon the assessment of its taxable income and so the tax that would otherwise be payable upon it. They were false in a material particular. Therefore, I have concluded that Lakes is liable to an administrative penalty under s 284-75(1) of the [Administration Act].
198 Having reviewed the elements of s 284-15 of Schedule 1 concerning the definition of “reasonably arguable” and the authorities and principles governing the question of when a matter is reasonably arguable, the Tribunal made this finding at [196] concerning the position taken by Sanctuary Lakes in relation to Issue 5:
… I find that there was room for a rational argument that, viewed objectively, Lakes was entitled to a deduction in relation to [Issue 5]. Therefore, Lakes is not liable to an administrative penalty under s 284-75(2). That makes no difference for it is already liable to such a penalty under s 284-75(1).
199 As to reasonable care, the Tribunal said this at [207] in relation to Issue 5:
On the material that I have and in the absence of any evidence regarding any particular steps that Lakes took to ensure that it did not make a statement false [sic] in a material particular, I am satisfied that its shortfall amounts resulted from a failure by it or its agent to take reasonable care to comply with a taxation law.
[original emphasis]
200 Even though the Commissioner had determined that the taxpayer was liable to a 25% penalty under the Administration Act either because the shortfall amount resulted from the taxpayer’s failure to take reasonable care in the making of a statement in compliance with a taxation law (s 284-75(1) and Item 3 of s 284-90(1)) or because the shortfall amount resulted from the taxpayer asserting the application of a taxation law in a way that was not reasonably arguable (s 284-75(2); Item 4 of s 284-90(1)), the Tribunal found that the taxpayer had made statements false in a material particular resulting in a shortfall amount from a failure by the taxpayer to take reasonable care to comply with a taxation law. As to the second basis, the Tribunal found, however, that the shortfall amount did not result from the taxpayer treating an income tax law as applying in the matter in a way that was not reasonably arguable because, viewed objectively, Sanctuary Lakes adopted a position as to the deductibility of the Item 5 expenditure which accommodated room for rational argument as to an entitlement to the deduction.
201 Having made those findings, the Tribunal then considered the question of the exercise of the discretion under s 298-20 of Schedule 1. The Tribunal began that discussion at [208] and then at [209] the Tribunal said this:
The taxation scheme is now based on a philosophy of self-regulation. A taxpayer such as Lakes submits returns on the basis that they contain information that is correct and on the understanding that the Commissioner will not, unless conducting an audit, generally question it in making an assessment on the basis of it. In light of these matters and with one exception, I do not consider that there are grounds for remitting the penalty and affirm the Commissioner’s decision regarding penalty. The one exception relates to its claim in relation to Issue 5. I have found at [196] that there was room for a rational argument that, viewed objectively, Lakes was entitled to a deduction in relation to that issue. In view of the object of the penalty regime that seems to me to justify the remission of the penalty imposed in relation to its claim for a deduction of $1,275,800 in the 2003 income year for [the relevant expenditure].
[emphasis added]
202 As to the decision, the Tribunal said this at [210]:
In relation to Issue 5, I set aside the Commissioner’s decision. That means that no penalty is imposed in relation to Lakes’ claim for a deduction of $1,275,800 in the 2003 income year for expenditure in relation to its obligations [arising under a particular Act].
203 In exercising the discretion under s 298-20 of Schedule 1, the Tribunal not only regarded the notion that there was room for rational argument that Lakes was entitled to a deduction as claimed, as a relevant consideration, it exercised the discretion on the footing that that consideration coupled with the object of the penalty regime was determinative of the exercise of the discretion. It did so on the footing that the object of the penalty regime justifies the remission of the penalty imposed by the Act on the taxpayer to zero. The taxpayer’s liability to a penalty arose under Division 284 having regard to the integers of s 284-75(1) and the intersection of that section with s 284-80, s 284-85 and s 284-90 of Schedule 1. The object of Division 284, as recited in s 284-10 of Schedule 1, is to provide a uniform administrative penalty regime for all taxation laws to enable administrative penalties to apply to entities that fail to meet their obligations under those laws in relation to five particular topics as already discussed.
204 The expression of the object of the Division (of uniformity of application of the administrative penalty regime) does not provide a proper foundation upon which the discretion may be exercised such that the penalty imposed by the Administration Act upon a taxpayer in failing either by itself or by its agent to take reasonable care in making a statement to the Commissioner, found to be false or misleading in a material particular and one which results in a shortfall amount, may be reduced to zero on the footing that the conferral of the discretion coupled with the “object of the penalty regime” (which must be a reference to the object of the Division under which liability to the penalty in issue arose) justifies, as a determinative exercise of the discretion, a conclusion that because the claim made by the taxpayer was nevertheless reasonably arguable, the conduct penalty imposed on the taxpayer is to be reduced to nothing.
205 In exercising the remittal discretion, the Tribunal gave no consideration at all to the circumstances of the conduct upon which the quantum of the penalty was determined by operation of the Act.
206 Upon a proper exercise of the discretion, the Tribunal might or might not conclude that the penalty imposed by the Administration Act on the taxpayer in failing to take reasonable care is to be remitted to zero. That is entirely a matter of merits assessment in the exercise of the discretion for the Tribunal in determining where the balance of factors lies. However, the exercise of the discretion must take account of the statutory scheme, the foundation upon which the Administration Act imposes the penalty and the questions that need to be examined in exercising the discretionary power to remit the penalty.
207 The Tribunal must be taken to have asked itself the question, does the object of the penalty regime justify the exercise of the discretion conferred by s 298-20(1) of Schedule 1 so as to remit the penalty imposed upon the taxpayer by operation of s 284-75(1), s 284-80, s 284-85 and s 284-90 of Schedule 1, to nil because the statement made to the Commissioner in the absence of reasonable care nevertheless gave rise to a reasonably arguable claim for a deduction.
208 The penalty regime under which Sanctuary Lakes became liable to an administrative penalty was that contained in s 284-75(1) and the Parliament selected the statutory method for determining the amount of the penalty by reference to the classes of conduct set out in s 284-90(1) of Schedule 1. The purpose of that statutory method is to discourage a taxpayer (either by itself or its agents) from engaging in an intentional disregard of a taxation law, recklessness and a failure to take reasonable care in the making of statements to the Commissioner about the material particulars. The Administration Act has not created an exception from liability to penalty in circumstances where a taxpayer has failed to take reasonable care but has nevertheless made a claim which is reasonably arguable. Nor has the Act effected a reduction in the amount of such penalty on such a basis. Nor has the Act released a taxpayer from a penalty on the footing that notwithstanding that it engaged in a failure to take reasonable care, the taxpayer nevertheless made a claim which was reasonably arguable.
209 In exercising the discretion under s 298-20(1) to remit, the Tribunal was required to ask itself, having regard to the evidence, what were the circumstances surrounding the failure on the part of the taxpayer or its agent to exercise reasonable care in making the statement to the Commissioner that might explain the conduct the subject of the penalty and what circumstances, on the evidence, ought to be taken into account in determining, as a matter of discretion, that notwithstanding the imposition of a penalty on the taxpayer by the Administration Act on the footing of a failure to take reasonable care in making the statement, the penalty ought nevertheless be reduced either in whole or in part, and as in this case, to nothing.
210 Those questions were not asked nor analysed in the two short paragraphs of the Tribunal’s reasons at [208] and [209] dealing with the topic of remittal of the penalty. No consideration is given to the relationship between the penalty scheme adopted by Part 4-25 of the Act and the discretion conferred under s 298-20, and in particular, the intersection between those sections within Division 284 giving rise to the penalty and the power conferred by s 298-20(1) to remit the penalty in whole or in part.
211 In that sense, the exercise of the discretion failed to have regard to the statutory scheme and the taxpayer’s failure to take reasonable care. The exercise of the discretion failed to reflect the correct questions to be asked under s 298-20 in the context of Part 4-25 of the Administration Act. By failing to ask the correct question, and by approaching the exercise of a discretion on the determinative footing that because the taxpayer ultimately made a claim which was reasonably arguable the conduct penalty imposed on the taxpayer by the Act is to be remitted to zero, the Tribunal fell into error of law in the exercise of the discretion.
212 Accordingly, the Commissioner’s appeal ought to be upheld in my view and the question of remittal of the penalty in relation to Issue 5 ought to be remitted to the Tribunal for further determination.
| I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. |
Associate:
Dated: 24 May 2013
| IN THE FEDERAL COURT OF AUSTRALIA | |
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 520 of 2012 |
| ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL |
| BETWEEN: | SANCTUARY LAKES PTY LTD Applicant |
| AND: | COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent |
| IN THE FEDERAL COURT OF AUSTRALIA | |
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 521 of 2012 |
| ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL |
| BETWEEN: | COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Applicant |
| AND: | SANCTUARY LAKES PTY LTD Respondent |
| JUDGE: | edmonds, greenwood and GRIFFITHS jJ |
| DATE: | 24 May 2013 |
| PLACE: | SYDNEY (HEARD IN MELBOURNE) |
REASONS FOR JUDGMENT
GRIFFITHS J:
213 I have had the considerable advantage of reading the reasons for judgment of Edmonds J in draft form. I agree with his Honour’s reasons for concluding that Lakes’ appeal in VID 520 of 2012 should be dismissed with costs.
214 In my opinion, the Commissioner’s appeal in VID 521 of 2012 should be dismissed and the Commissioner ordered to pay Lakes’ costs of that appeal
215 The relevant issues are:
1. first, whether the Tribunal took into account an irrelevant consideration in exercising the discretion under s 298-20 of Sch 1 of the Taxation Administration Act 1953 (Cth) (TAA 1953), namely the Tribunal’s earlier finding that Lakes’ position in respect of Issue 5 was reasonably arguable for the purposes of s 284-75(2) of Sch 1 of the TAA 1953; and
2. secondly, (and alternatively), did the Tribunal fail to apply the correct test, as required by s 298-20 of Sch 1 of the TAA 1953, by treating the Tribunal’s finding that Lakes had a reasonably arguable position as determinative of the question of the application of s 298-20, without addressing or making any findings on Lakes’ particular or personal circumstances.
216 The Commissioner’s appeal only concerns the Tribunal’s decision to remit the penalty to zero in respect of Issue 5, which relates to Lakes’ claim for a deduction of $1,275,800 in the 2003 taxation year for expenditure arising from its obligations under s 173 of the PE Act. Before proceeding to consider the two grounds of appeal in respect of this matter, it is convenient to say a few things concerning the Tribunal’s determination that Lakes was liable to administrative penalty.
217 In [143] to [151] of his Honour’s reasons, Edmonds J summarises the Tribunal’s reasons for determining that Lakes was liable to an administrative penalty in relation to inter alia Issue 5. I gratefully adopt that summary and would add the following comments.
218 First, it is evident that the Tribunal approached the issue of liability to a penalty and remission in respect of Item 5 on the basis that the Commissioner had imposed a penalty of 25 percent of the shortfall amount based on both failure to take reasonable care and the Commissioner’s determination that the taxpayer’s position was not reasonably arguable. So much is apparent from the table which appears in R[179]. As Lakes points out, the Commissioner’s notice of assessment and liability to pay penalty dated 28 August 2006, which dealt with Issue 5, simply recorded that the penalty amount had been imposed on the basis of “not reasonably arguable”. It is evident, however, from the Commissioner’s reasons for decision rejecting Lakes’ objection to the assessment that the Commissioner based his decision to impose a 25 percent penalty in respect of Issue 5 on the dual basis of failure to take reasonable care and not reasonably arguable position. That dual basis was not upheld by the Tribunal. It determined to impose administrative penalty on Lakes in respect of Issue 5 on the basis of failure to take reasonable care alone and then proceeded to remit the 25 percent penalty to zero because of its finding that Lakes had a reasonably arguable position.
219 Secondly, and for completeness, there is a curious aspect of the Tribunal’s consideration of the “reasonably arguable” matter in the context of its determination that Lakes was liable to an administrative penalty. It relates to R[181] and the extract set out there from s 284-75(2) of Sch 1 to the TAA 1953. For convenience, R[181] is as follows:
As it was enacted in the income years in issue in this case, s 284-75(2) provided that a taxpayer was also liable to an administrative penalty if that taxpayer made:
(a) … a statement to the Commissioner … ; and
(b) in the statement, you treated an income tax law as applying to a matter or identical matters in a particular way that was not reasonably arguable; and
(c) you have a shortfall amount as a result of the statement.
220 For the income year 2003, s 284-75(2) was actually in the following terms:
Section 284-75 Liability to penalty
…
(2) You are liable to an administrative penalty if:
(a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under an *income tax law; and
(b) in the statement, you or your agent treated an *income tax law as applying to a matter or identical matters in a particular way that was not *reasonably arguable; and
(c) you have a *shortfall amount as a result of the statement; and
(d) item 4, 5 or 6 of the table in subsection 284-90(1) applies to you (emphasis added).
…
221 The Tribunal’s extract at R[181] omits any reference to either paragraph 284-75(2)(d) or to the phrase “or your agent” in s 284-75(2)(b). The latter omission appears inconsequential in the circumstances here, but the former omission cannot be dismissed so lightly. It bears upon the proper construction not only of s 284-75 but also, potentially, s 298-20. Section 284-75(2)(d) is an important provision because it operates to limit the category of individual taxpayers who are exposed to liability to an administrative penalty. The only taxpayers who have that exposure are those who, in broad terms, make a statement concerning the application of an income tax law to particular matters which is not reasonably arguable and the shortfall amount resulting from that position is an amount which exceeds the greater of $10,000 or one percent of income tax payable calculated on the basis of the taxpayer’s return. In other words, there is a threshold which operates in respect of the shortfall amount produced by a not reasonably arguable position. A taxpayer who has a position which is not reasonably arguable is not liable to pay penalty tax on that basis alone unless the shortfall amount resulting from that position exceeds the specified threshold.
222 It is convenient to now deal with the Commissioner’s two grounds of appeal concerning the Tribunal’s decision to remit the administrative penalty in respect of Issue 5 from 25% to zero. I will deal first with the Commissioner’s ground of appeal to the effect that the Tribunal took into account an irrelevant consideration, which the Commissioner described as his “primary ground of appeal”, before dealing with the Commissioner’s “incorrect test” argument.
Irrelevant consideration in exercising the discretion to remit?
223 The Commissioner’s argument can be summarised as follows:
(a) in exercising its discretion under s 298-20 to remit the penalty amount the Tribunal took into account an irrelevant consideration, namely its finding that Lakes’ position in respect of Issue 5 was reasonably arguable;
(b) although the discretion under s 298-20 is unconfined by any explicit conditions or factors, the authorities concerning the operation of that provision (and its predecessor provision, namely s 227(3) of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936) establish the following relevant principles:
(i) the penalties under s 284-90 are imposed by operation of the legislation itself, based upon the culpability of the taxpayer and/or the taxpayer’s agent. The Commissioner’s only discretion is to remit a penalty after it has been imposed (citing Collier J’s decision in Commissioner of Taxation v Dixon 2007 ATC 4,748 at [22] and [44] (Dixon at first instance), which decision was successfully appealed on other grounds in Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287 (Dixon));
(ii) the relevant question for determination when considering the exercise of the discretion to remit is whether any part of the penalty should be remitted on the basis that the outcome is harsh, having regard to the particular circumstances of the taxpayer (citing the Full Court’s decision in Dixon at [26] per Spender, Ryan and Emmett JJ);
(iii) it is not necessary for there to be “special circumstances” before the discretion can be exercised (citing Federal Commissioner of Taxation v Traviati (2012) 205 FCR 136 at [90] per Middleton J) (Traviati), but see also Dixon at [21]); and
(iv) nevertheless the “particular” circumstances that are relevant to the exercise of the discretion must be “personal” to the taxpayer and it is always necessary to focus on the taxpayer and his or her particular circumstances in considering whether the whole or any part of the penalty should be remitted (citing Traviati at [78], [90] and [107] per Middleton J); and
(c) heavy reliance was placed upon Traviati, which it was said also stood for the proposition that whether or not a taxpayer’s position is reasonably arguable is an irrelevant consideration to the exercise of the discretionary remittal power because:
(i) whether or not the position put by the taxpayer to the Tribunal is objectively reasonably arguable there is no relevance to the particular and personal circumstances of the taxpayer and therefore, to whether the imposition of a penalty would be harsh in those particular and personal circumstances; and
(ii) the structure of the provisions imposing liability to an administrative penalty and the relationship between the remission power and those provisions indicate that the question of the application of the remission power is an entirely separate enquiry consequent on a finding that a taxpayer is liable to an administrative penalty.
224 Lakes’ submissions on this aspect of the Commissioner’s appeal may be summarised as follows:
(a) the notice of assessment of penalty in respect of Issue 5 stated only one basis for the 25 percent penalty, namely not reasonably arguable;
(b) the relevant question for determination in respect of the power to remit under s 298-20 should not be expressed in terms of whether a penalty would be “harsh” in the particular circumstances of the taxpayer; harshness is a relevant factor but is not the test and should not be employed to fetter the otherwise broad discretion;
(c) emphasis was placed upon the fact that the power under s 298-20 is a power to remit all or a part of the penalty. This allows, for example, a taxpayer who falls only just short of the reasonable care standard to receive a greater degree of remission than a taxpayer who does not come close;
(d) while accepting that the reasonably arguable test is distinct from the reasonable care test as found in Traviati, there is still a significant degree of overlap. If a statement is reasonably arguable, it follows that reasonable care was taken in making the statement; and
(e) there is nothing in the subject matter, scope or purpose of the TAA 1953 which indicates that a decision-maker is prohibited from taking into account the fact that the taxpayer’s position is reasonably arguable.
Consideration
225 For the reasons which follow I reject the Commissioner’s submission that the Tribunal’s finding that Lakes’ position regarding Issue 5 was reasonably arguable was an irrelevant consideration in the exercise of the discretion to remit under s 298-20. As will emerge below, I consider that the contrary view expressed in Traviati should not be followed.
226 I propose to address the Commissioner’s irrelevant considerations argument under the following topics:
(a) relevant provisions of the TAA 1953 bearing upon the subject matter, scope and purpose of the discretion to remit;
(b) the decision in Traviati;
(c) brief legislative history of penalty and remission provisions in the ITAA 1936, in circumstances where the provisions in Divisions 284 and 298 of the TAA 1953 are broadly based on those provisions in the ITAA 1936 (at least as they were after 1992); and
(d) relevant extrinsic materials to the Bills which inserted Divisions 284 and 298 into the TAA 1953.
(a) Analysis of relevant provisions of TAA 1953
227 It is common ground that the question whether a particular consideration is a relevant or irrelevant consideration in exercising a statutory discretion such as s 298-20 of the TAA 1953 (which is unconfined in its terms), is to be determined by reference to the subject matter, scope and purpose of the relevant statute, including the particular provision conferring the discretion. The leading authority for this principle is, of course, Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 at 39-40 per Mason J. The principle is of general application but it has been applied in many cases in the context of taxation legislation. For example, in BHP Billiton Direct Reduced Iron Pty Ltd v Deputy Federal Commissioner of Taxation 2007 ATC 5,071 at [111], French J (as his Honour then was) said in dealing with the discretion to extend time under s 170-50(2)(d) of the Income Tax Assessment Act 1997 (Cth):
A statutory discretion to extend time, unconfined by any explicit conditions or factors to be considered, is necessarily to be exercised within boundaries created by the subject matter, scope and purpose of the statute and of the particular provision of which the discretion is conferred. While there may be generic considerations relevant to different kinds of time limits and associated discretions, it is necessary in any particular case to focus upon the particular subject matter, scope and purpose of the statutory time limit and the discretion in question.
228 A similar approach was taken in respect of other provisions in tax legislation involving broad statutory discretions which are unconfined by explicit conditions or factors to be considered, such as Hely J’s decision in Elias v Commissioner of Taxation (2002) 123 FCR 499 at [56] to [57] concerning the Commissioner’s discretion under s 255-10(1) of the TAA 1953 and Gordon J’s decision in Federal Commissioner of Taxation v Burness (2009) 77 ATR 61 at [19] in respect of the discretion to remit under s 227(3) of the 1936 ITAA.
229 Reference should also be made, of course, to the Full Court’s decision in Dixon where that approach was applied in the context of determining whether the decision-maker considering whether or not to exercise the discretion to remit under s 298-20 was entitled to have regard to the fact that no harm had been done to the revenue because a false statement made by the taxpayer was discovered before anyone relied on it. The Full Court held that this was an irrelevant consideration because of indications given in other provisions of the TAA 1953, namely:
(a) although allowance is made in the legislative scheme for penalty to be reduced where a taxpayer discloses a shortfall to the Commissioner, no provision is made where the shortfall is detected by the Commissioner before any harm is done; and
(b) the general interest charge operates to compensate the Commissioner for any harm to the revenue resulting from a shortfall amount.
230 For the purposes of this appeal all the relevant provisions concerning penalties and remission of penalties are set out in the TAA 1953. Those provisions were inserted into the TAA 1953 by either the A New Tax System (Tax Administration) Act 1999 (Cth) or the A New Tax System (Tax Administration) Act 2000 (No 2) (Cth). It is appropriate, therefore, to set out the relevant statutory provisions of the TAA 1953 which bear upon the question whether the fact that a taxpayer has a reasonably arguable position is an irrelevant consideration to the exercise of the discretion to remit under s 289-20 of Sch 1 of the TAA 1953. It is convenient to first outline the provisions in Division 284 which deals with the imposition of administrative penalties and then outline Division 298, which deals with remission of penalties.
231 Division 284 falls within Part 4-25 of the TAA 1953. It was inserted by the A New Tax System (Tax Administration) Act (No 2) 2000 (Cth) (I will deal below with the Explanatory Memorandum to the Bill). Division 284 contains provisions which impose administrative penalties on entities which fail to meet their obligations under taxation laws, including in relation to the making of false or misleading statements and taking unarguable positions. The object of Division 284 is expressed in s 284-10 as to provide a uniform administrative penalty regime for all taxation laws to enable administrative penalties for entities that fail to meet their obligations under those laws in relation to, inter alia, making false or misleading statements and taking a position that is not reasonably arguable. The effect of ss 284-20 and 284-25 is to apply Division 284 to a statement made in any way for a purpose connected with a taxation law, including statements made in an approved form by a taxpayer’s agent.
232 The circumstances in which a taxpayer is liable to an administrative penalty are set out in s 284-75. During the 2003 taxation year, they included the circumstance specified in s 284-75(1), namely where a taxpayer (or the taxpayer’s agent) makes a statement to the Commissioner, the statement is false or misleading in a material particular and the taxpayer has a “shortfall amount” as a result of the statement. What constitutes a “shortfall amount” is described in s 284-80. A shortfall amount is the amount by which a relevant payment or credit from the Commissioner is more than it would otherwise have been because, relevantly, a false or misleading statement made by the taxpayer or the taxpayer’s agent has resulted in the Commissioner determining that he must pay or credit to the taxpayer an amount which is more than it would otherwise have been.
233 Where there is a shortfall amount, s 284-85 operates to require that the “base penalty amount” be worked out under s 284-90. Items 3 and 4 of that provision are particularly relevant here as they deal respectively with the base penalty amount in circumstances of failure to take reasonable care and adopting a position which is not reasonably arguable. At the relevant time those items were as follows:
Section 284-90 Base penalty amount
(1) The base penalty amount under this Subdivision is worked out using this table:
| Base penalty amount Item In this situation: | The base penalty amount is: | |
| … | ||
| 3 | Your *shortfall amount or part of it resulted from a failure by you or your agent to take reasonable care to comply with a *taxation law | 25% of your *shortfall amount or part |
| 4 | Your *shortfall amount or part of it resulted from you or your agent treating an *income tax law as applying to a matter or identical matters in a particular way that was not *reasonably arguable, and that amount is more than the greater of $10,000 or 1% of the income tax payable by you for the income year, worked out on the basis of your *income tax return | 25% of your *shortfall amount or part |
234 The base penalty amount is the amount of the penalty, unless the base penalty amount is increased under s 284-220 or reduced under s 284-225. The former provision deals with increases where, for example, the taxpayer has taken steps to prevent or obstruct the Commissioner from finding out about the shortfall amount. The latter provision deals with a reduction of the base penalty amount where, for example, the taxpayer tells the Commissioner voluntarily about a shortfall after the Commissioner notifies the taxpayer that a tax audit is to be conducted.
235 It will be noted from the terms of s 284-90 set out above in [21] that the reference in Item 4 to a matter being “reasonably arguable” is an asterisked term, which means that it is a defined term. During the relevant taxation year, s 284-15 in Sch 1 to the TAA 1953 provided as follows:
284-15(1) When a matter is reasonably arguable
(1) A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is as likely to be correct as incorrect, or is more likely to be correct than incorrect.
(2) To the extent that a matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, had the Commissioner exercised the discretion in the way assumed, a court would be as likely as not to decide that the exercise of the discretion was in accordance with law.
(3) Without limiting subsection (1) these authorities are relevant:
(a) a *taxation law;
(b) material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901;
(c) a decision of a court (whether or not an Australian court), the *AAT or Board of Review;
(d) a public ruling within the meaning of Part IVA.
It might be noted that, with effect from 29 June 2005, the word “about” was inserted in both ss 284-15(1) and (2) immediately before the words “as likely” by operation of the Tax Laws Amendment (Improvements to Self Assessment) Act 2005 (Cth) with effect from 29 June 2005.
236 It is convenient to now turn to Division 298 of Sch 1 to the TAA 1953. Division 298 was originally inserted into that Act by Sch 12 of A New Tax System (Tax Administration) Act 1999 (Cth). Division 298 is headed “Machinery provisions for penalties”. It is made clear in s 298-5 that the Subdivision applies where inter alia an administrative penalty is imposed on an entity by another Division in Part 4-25 of the TAA 1953 (such as Division 284).
237 During the 2003 taxation year, s 298-20 provided as follows:
Section 298-20 Remission of penalty
(1) The Commissioner may remit all or a part of the penalty.
(2) If the Commissioner decides:
(a) not to remit the penalty; or
(b) to remit only part of the penalty;
the Commissioner must give written notice of the decision to the entity.
(3) If:
(a) the Commissioner refuses to any extent to remit an amount of penalty; and
(b) the amount of penalty payable after the refusal is more than 2 penalty units; and
Note: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit.
(c) the entity is dissatisfied with the decision;
the entity may object against the decision in the manner set out in Part IVC.
238 It is important to note that, under this provision, the Commissioner’s power of remission includes a power to remit the whole or only part of a penalty.
239 Broadly speaking, the legislative scheme under the TAA 1953 has the following relevant features:
(a) both the liability to a penalty and the base amount of that penalty are imposed by the legislation itself;
(b) such liability is imposed by reference to the happening of various prescribed events, including:
(i) the making of a false or misleading statement which has a material effect in the manner described in s 284-75(1); or
(ii) in making a statement, the taxpayer treated an income tax law applying to a matter in a way that was not reasonably arguable and the consequential shortfall amount is above the threshold set out in item 4;
(c) the base amount of a penalty is determined by the seriousness of the behaviour or conduct of the taxpayer and his/her agent which created the shortfall amount; and
(d) while the regime has a set of rules and accompanying penalties which apply in prescribed circumstances, it also confers a discretion on the Commissioner to remit a penalty in whole or in part, which discretion is not explicitly confined by express criteria.
240 In my view, that legislative scheme does not preclude a decision-maker who is deciding whether or not to exercise the discretion to remit under s 298-20 of the TAA 1953 taking into consideration a finding that the taxpayer’s position was reasonably arguable in circumstances where penalty has been imposed for failing to take reasonable care. In particular, in contrast with Dixon, I do not consider that there are any indications in other provisions of the TAA 1953 which operate to render that consideration an irrelevant consideration.
241 The view I have expressed above is inconsistent with the view taken in Traviati. Accordingly, I will now explain why in my respectful view Traviati is wrong on this issue.
(b) The decision in Traviati
242 In Traviati, the taxpayer argued that even though it failed to avoid the imposition of a penalty under one or more shortfall sections, the fact that the taxpayer had some degree of reasonable argument was relevant to the exercise of the discretion to remit. The primary judge made the following findings and observations in [86] and [87] in respect of that approach:
There is a difficulty with this approach. If the Court has already found that the taxpayer does not have a reasonably arguable position in relation to their tax return for the purposes of s 226K, the legislature clearly intended that they would be subject to a 25% penalty under s 226K. Likewise, if a taxpayer has failed to take reasonable care in preparing their tax return, the legislature clearly intended that they would be subject to a 25% penalty under s 226G. The point is, the taxpayer failed to reach the minimum standard to eschew the penalty, either by objective argument (s 226K) or by reason of their behaviour (s 226G).
The taxpayer cannot then rely [on] the same argument, or behaviour, to show that they went some way to meeting that standard (but did not meet it) to show that the penalty should be remitted under s 227(3). The taxpayer similarly cannot rely on an argument that because they have a reasonably arguable position, they should avoid the penalty under s 226G for failing to take reasonable care, on the basis that this would otherwise be a “harsh” circumstance. The legislature has set clear standards for taxpayers to meet when preparing their tax returns. The question of whether to remit the penalty under s 227(3) comes after the question of whether to impose a penalty under one or more of the shortfall sections, and constitutes an entirely separate enquiry.
243 The taxpayer also argued in Traviati that its position was reasonably arguable because that position was supported by a judgment at first instance by Allsop J (as his Honour then was) in Malouf v Federal Commissioner of Taxation (2008) 68 ATR 470 (Malouf) (which decision was reversed on appeal in Federal Commissioner of Taxation v Malouf (2009) 174 FCR 581) (FCT v Malouf). The primary judge doubted that Malouf was relevant because he found at [83] that it dealt with a different issue. His Honour added that Malouf was an irrelevant consideration because it “did not address the particular circumstances of the taxpayer in this proceeding, and the circumstances surrounding the taxpayer and the event which brought about a penalty under Pt VII of the 1936 Act” (at [83] and see also [88] and [90]).
244 In my respectful opinion, some of the primary judge’s findings and observations in those passages are either questionable or inapplicable to the circumstances here for the following reasons.
245 First, accepting that the two standards of failing to take reasonable care and taking a position which is not reasonably arguable are different and independent standards (at least for the purposes of imposing liability to administrative penalty, as to which see Traviati at [36] to [39] per Middleton J; Sent v Federal Commissioner of Taxation (2012) 57 AAR 27 at [219] per Murphy J; Fowler v Commissioner of Taxation [2012] FCA 1040 at [135] per Kenny J and Pratt Holdings Pty Ltd v Commissioner of Taxation [2012] FCA 1075 at [167] per Gordon J), it is difficult to understand why the latter matter is an irrelevant consideration in exercising the separate power conferred by s 298-20. That is particularly so in a case, such as here, where administrative penalty is imposed on the sole basis of the taxpayer (or its agent) failing to take reasonable care, but it is found that the taxpayer’s position was reasonably arguable. Where penalty is imposed for failing to take reasonable care, why is it not relevant in exercising the separate power of remission under s 298-20 to take into account that the taxpayer nevertheless had a reasonably arguable position? That consideration, when weighed with other relevant considerations, may not mean that the penalty is remitted in whole (or, in some cases, even in part), but why is the consideration irrelevant? It is not a case of the reasonably arguable position of a taxpayer negating an earlier finding of failing to take reasonable care because the two standards are plainly different, but rather taking that position into account in determining the separate question whether it is appropriate to remit the penalty either in whole or in part.
246 Secondly, the reference in [87] in Traviati to “a ‘harsh’ circumstance” is consistent with a separate finding in Traviati that the test in determining whether or not to remit penalty under s 227(3) of the ITAA 1936 (and presumably also its counterpart provision in s 298-20 of the TAA 1953) is whether it is harsh in the particular circumstances of the taxpayer to impose the penalty. Thus in Traviati, the primary judge stated at [78]:
Broadly speaking, the main consideration relevant to the discretion in s 227(3) was whether any part of the penalty should be remitted on the basis that the outcome is harsh so as to provide an unjust result, having regard to the particular circumstances of the taxpayer: Burness; and Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287 at [26] (in relation to s 298-20 of Sch 1 to the Taxation Administration Act, a provision with a similarly broad discretion to remit penalties). There need not be special circumstances before the discretion can be exercised: Dixon at [21].
247 In my view, there is no warrant for reading into the broad discretion conferred by s 298-20 of the TAA 1953 (or, indeed, former s 227(3) of the ITAA 1936) a requirement that the decision-maker must be satisfied that the outcome is “harsh” for the particular taxpayer in his or her individual circumstances unless penalty is remitted. One rhetorically asks what is the basis for reading into s 298-20 a term which is simply not there? It is true that in Dixon the Full Court used the word “harsh” in the context of determining what order was appropriate where the Court found that the Tribunal had erred in the exercise of the s 298-20 discretion. At [26], the Full Court said:
The ultimate conclusion of the primary judge on the relevant question of law raised by the appeal was correct. However, it is by no means clear that her Honour correctly construed the Tribunal's reasoning. There was no basis for her Honour, in effect, to substitute her own decision on the matter under review by the Tribunal. The matter should have been remitted to the Tribunal for consideration of the question of whether any part of the penalty should be remitted on the basis that the outcome is harsh, having regard to the particular circumstances of the Taxpayer (emphasis added).
248 In my view, the Full Court did not intend to suggest in that passage that harshness is an essential element of the test under s 298-20. Rather, the Full Court’s reference to “harshness” simply reflects the Full Court’s description of the primary judge’s construction of the Tribunal’s reasons in that case as involving “a conclusion that the penalty was harsh in the circumstances…” (see [20] of the Full Court’s reasons for judgment). It may be appropriate in a particular case to remit a penalty on the basis that the outcome otherwise could be described as “harsh”, but that does not mean that “harshness” should be elevated to an essential element in determining whether or not to remit the penalty under s 298-20.
249 In my opinion, the correct question which arises under s 298-20 should not be expressed in terms of “harshness”. Rather, the question is simply whether the decision-maker is satisfied having regard to the taxpayer’s particular circumstances that it is appropriate to remit penalty in whole or in part. For example, a decision-maker might determine that it is appropriate to remit penalty in whole or in part because otherwise the outcome for a particular taxpayer would be unreasonable or unjust (and therefore inappropriate), as opposed to harsh (see the observations of McHugh and Gummow JJ in Byrne v Australian Airlines Limited (1995) 185 CLR 410 at 465 on the different meanings of the individual words “harsh”, “unjust” and “unreasonable” in a different context concerning unfair dismissal and the collocation of those words in both legislation and an industrial award). In my view, there is no warrant for confining the otherwise broad discretion in s 298-20 to circumstances where the outcome of imposing administrative penalty would otherwise be “harsh”.
250 Thirdly, the final sentence in [87] of Traviati which is set out in [30] above, tends to support – and not oppose – the view that the fact that a taxpayer has a reasonably arguable position is a relevant consideration in the exercise of the discretion under s 298-20 in circumstances where penalty has been imposed for breach of the different standard of failing to take reasonable care. That is because the provisions imposing penalty tax and conferring a discretion to remit that tax are separate but related provisions. The discretion to remit will not arise for consideration unless the decision-maker determines to impose a penalty. Obviously if a penalty is imposed because of a failure to take reasonable care there would be no point in the taxpayer arguing that the penalty should be remitted because the taxpayer did take reasonable care. But different considerations arise if penalty is imposed for failing to take reasonable care and the taxpayer had a reasonably arguable position. In my view, that is a relevant consideration which the decision-maker may properly take into account in determining the exercise of the discretion under s 298-20. In most cases this is unlikely to result in the penalty amount being remitted in full (having regard to the different standards which are implicit in the concepts of failing to take reasonable care and having a position which is not reasonably arguable). But in a particular case the decision-maker might well decide that it is appropriate to remit the penalty in part or, perhaps, in full in a case where, for example, there are common facts underlying the issues of reasonable care and reasonably arguable position. It is a matter for the decision-maker to weigh in the balance all relevant matters which are raised for consideration under the umbrella of the taxpayer’s particular circumstances.
251 Fourthly, it must be accepted that the power under s 298-20 requires consideration to be given to the particular circumstances of the taxpayer. As noted above, the primary judge in Traviati explained at [83] why Malouf was not relevant to the particular circumstances of the taxpayer there. The circumstances here are different. Resolution of Issue 5 turned on the proper construction of various relevant provisions in the contractual documentation relating to Lakes’ obligations under s 173 of the Planning and Environment Act 1987 (Vic) (PE Act), including clause 5.2 of the Supplementary Agreement. The Tribunal accepted Lakes’ argument that it had a reasonably arguable position that its obligations under s 173 of the PE Act arose directly and immediately upon Lakes’ entry into the Development Lease as amended by the Supplementary and Loose Ends Agreements, with the consequence that the relevant expenditure was deductible in the 2003 income year. In my view, the construction of contractual provisions to which a taxpayer is a party is a matter which necessarily relates to the particular circumstances of the taxpayer.
252 Fifthly, the legislative history relevant to Divisions 284 and 298 of the TAA 1953, including the history of generally equivalent provisions dealing with penalty and remission under the ITAA 1936, support the views expressed above. It is that topic to which I now turn.
3. Brief legislative history of penalty and remission provisions in ITAA 1936
253 The uniform administrative penalty regime in force under the TAA 1953 in the 2003 taxation year was substantially similar to the regime under the ITAA 1936 relating to penalties and remission following amendments made to that Act by the Taxation Laws Amendment (Self Assessment) 1992 (Cth).
254 In view of the historical relationship between the relevant provisions dealing with penalties and remission in the ITAA 1936 and the TAA 1953, it is relevant to have regard to the legislative history relating to provisions dealing with penalties and remission under the ITAA 1936 (noting that during the period 2000 to 2006, the ITAA 1936 and the TAA 1953 contained substantially similar provisions dealing with these matters and in 2006 the relevant provisions in Part VII of the ITAA 1936 Act were repealed by the Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006 (Cth).
255 Relevant penalty and remission provisions in the ITAA prior to 1992: Prior to the amendments in 1992 to the ITAA 1936, s 223(1) of the ITAA 1936 imposed a penalty by way of additional tax for the making of false or misleading statements. Immediately before its repeal in 1992, that sub-section was in the following terms:
223(1) [Additional tax] Where –
(a) a taxpayer
(i) makes a statement to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, that is false or misleading in a material particular; or
(ii) omits from a statement made to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, any matter or thing without which the statement is misleading in a material particular way; and
(b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis of the statement were not false or misleading, as the case may be,
The taxpayer is liable to pay by way of penalty, additional tax equal to double of the amount of the excess.
256 Prior to the 1992 amendments, the Commissioner’s power to remit the whole or any part of additional tax was to be found in s 227, which was in the following terms:
227(1) [Commissioner to assess]
The Commissioner shall make an assessment of the additional tax payable by a person under a provision of this Part.
227(2) [Notice of assessment]
Nothing in this Act shall be taken to preclude notice of an assessment made in respect of a person under sub-section (1) from being incorporated in notice of any other assessment made in respect of the person under this Act.
227(3) [Commissioner’s discretion to remit]
The Commissioner may, in the Commissioner’s discretion, remit the whole or any part of the additional tax payable for a person under a provision of this Part, but, for the purposes of the application of sub-section 33(1) of the Acts Interpretation Act 1901 to the power of remission conferred by this sub-section, nothing in this Act shall be taken to preclude the exercise of the power at a time before an assessment is made under sub-section (1) of the additional tax.
257 It is notable that the Commissioner’s discretion to remit conferred by s 227(3) of the ITAA 1936 was not confined by any explicit factors or considerations. The discretion was very broad.
258 Relevant penalty and remission provisions during the period 1992 to 2006: The uniform administrative penalty regime was introduced by A New Tax System (Tax Administration) Act (No 2) 2000 (Cth) and applied to the income years 2000-2001 and following. The stated purpose of the new regime was to impose uniform administrative penalties on taxpayers for failing to satisfy obligations under all taxation laws. The regime consolidated and standardised the various penalty provisions throughout different existing taxation laws, including the ITAA 1936. Moreover, it was stated in the Revised Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (No 2) 2000 at [1.16] that Division 284 to Sch 1 to the TAA 1953 was based on the then existing penalty provisions in Part VII of the ITAA 1936.
259 It is relevant, therefore, to trace the legislative history of those penalty provisions and the related power to remit. The penalty provisions in Part VII of the ITAA 1936 had been substantially amended in 1992 following the introduction of the self-assessment system. Under the penalty regime in Part VII prior to 1992, additional tax by way of penalty was imposed at 200 percent in all cases involving the making of a false and misleading statement in a material particular which resulted in a taxpayer paying less tax than they would otherwise have paid. No express distinction was drawn between the levels of care exercised by a taxpayer in making a false or misleading statement or whether the taxpayer’s position was reasonably arguable. Prior to the 1992 amendments, the Commissioner exercised his power to remit to reflect the culpability of the taxpayer. As Rich and Dixon JJ commented in Jolly v Federal Commissioner of Taxation (1935) 53 CLR 206 at 214, the imposition and remission of additional tax by way of penalty gave the Commissioner “a summary power of imposing upon taxpayers guilty of the kinds of acts or omission specified a liability to further exaction commensurate with their fault”.
260 The new regime introduced in 1992 by the Taxation Law Amendment (Self Assessment) Act 1992 (Cth) adopted a new approach and prescribed the circumstances in which penalties were imposed and the penalty rate applicable in particular circumstances. It was explained in the Explanatory Memorandum to the 1992 Bill that the effect of self assessment was that “taxpayers are now effectively required to determine their own taxable income. The new penalties set out the standards that taxpayers should meet in fulfilling their tax obligations in a self assessment environment”.
261 The Commissioner’s power to remit penalty in provisions such as s 227(3) of the ITAA 1936 was also addressed in the Explanatory Memorandum to the 1992 Bill. It is significant to note that nothing on that topic in the Explanatory Memorandum suggests that the Commissioner could not take into account the fact that the taxpayer had a reasonably arguable position in determining whether or not to remit penalty. Indeed, the contrary is the case, as is evident in the examples which are set out below in the following extracts from the Explanatory Memorandum at pages 98-99:
Remissions
The purpose of the new penalty provisions is to reduce the risk of penalties for taxpayers who have not been culpable and to provide standards for taxpayers in carrying out their taxation obligations. With this end in mind the Bill prescribes specific penalties for breaches of the standards set by the Bill, which means that taxpayers will know what penalties will be attracted for delinquent behaviour. This replaces the previous system where penalty was automatically attracted at a rate of 200%, and remitted at the discretion of the Commissioner.
While the Bill provides a set of rules and accompanying penalties which will cover all but exceptional cases, there may be cases that do not fit neatly into a category, or for which the prescribed rates of penalty are inappropriate. For this reason the discretion which the Commissioner has to remit penalty in whole or in part (sections 227 and 160ASB of the ITAA) is not removed by this Bill, so that the Commissioner has the flexibility to deal with hard cases that may arise. The AAT is able to exercise this power of remission in appropriate cases when reviewing decisions of the Commissioner, and the courts are able to adjudicate on whether the discretion was exercised in accordance with the law.
Some examples of where it may be appropriate for the Commissioner to exercise the discretion to remit penalties are:
• where an authority that is material to whether a taxpayer has a reasonably arguable position is published immediately before a taxpayer lodges its return of income, in circumstances where the taxpayer could not reasonably be expected to have been aware of the authority’s existence;
• where a taxpayer, because of an extraordinary transaction, exceeds the threshold beyond which the reasonably arguable position test applies, and the circumstances of the case are such that it would be unjust to penalise the taxpayer solely by reason of failing that test;
• where the application of the special rules in respect of partners and trustees imposes an overly burdensome penalty on the defaulting partner or trustee (emphasis added).
262 The relevant extrinsic materials relating to the Bills which led to the insertion of Divisions 284 and 298 into the TAA 1953 in 1999 and 2000 do not suggest that there was any intention to preclude a decision-maker from taking into account as a relevant consideration the fact that a taxpayer had a reasonably arguable position in determining whether or not to remit the administrative penalty imposed on the basis of failure to take reasonable care. I will now highlight the relevant passages from those extrinsic materials.
(d) Extrinsic materials relating to Divisions 284 and 298 of the TAA 1953
263 Explanatory Memorandum to the A New Tax System (Tax Administration) Bill 1999: Division 298 was inserted into the TAA 1953 by the A New Tax System (Tax Administration) Act 1999 (Cth). The Explanatory Memorandum accompanying the relevant Bill stated at [7.26] that Division 298 was inserted into Sch 1 to the TAA 1953 “to provide generic machinery provisions for all civil penalties in the taxation law that are expressed as penalty units”.
264 Reference was also made in [7.28] of the Explanatory Memorandum to the Commissioner’s power to remit the penalty either in whole or in part, but no direct information was provided concerning the scope or limits on that power.
265 Revised Explanatory Memorandum to the Bill inserting Division 284 in the TAA 1953: Division 284 was inserted into the TAA 1953 by the A New Tax System (Tax Administration) Act (No 2) 2000 (Cth). It was made clear in the Revised Explanatory Memorandum to the Bill that the object was to introduce a uniform administrative penalty regime into Sch 1 to the TAA 1953 with a view to streamlining the existing penalty regimes in various taxation laws. As noted above, the Revised Explanatory Memorandum explicitly acknowledged in [1.16] that new Division 284 was based on the existing penalty provisions in Part VII of the ITAA 1936.
266 The Revised Explanatory Memorandum also addressed the new provisions relating to remission of shortfall amount penalties. Paragraphs 1.139 to 1.142 are relevant. They are in the following terms:
1.139 All penalties imposed under Part 4-25 of Schedule 1 to the TAA 1953 will be subject to uniform machinery provisions. These provisions which are in Division 298 require the Commissioner to give a notice of penalty to the taxpayer: the penalty is due and payable 14 days after the notice is given to the taxpayer. The GIC is payable on any penalty unpaid after the due date. Section 298-20 allows the Commissioner to remit a penalty in whole or in part. A decision of the Commissioner to remit the penalty, or to remit it only in part, is a reviewable decision under Part IVC of the TAA 1953.
1.140 There are a number of factors which the Commissioner takes into account when deciding to remit a penalty. These include:
• treating taxpayers in like circumstances consistently;
• considering a taxpayer’s particular circumstances and compliance history; and
• tailoring the penalty to secure improvements in compliance behaviour.
1.141 Remission guidelines for statement and scheme penalties will be published by the ATO. The guidelines will be based on the ATO Compliance Model and will be consistent with the principles contained in the Taxpayers’ Charter. While recognising that all taxpayers are required to comply with the requirements of the taxation law, the guidelines will reflect the above factors and the reality that taxpayers have to adapt to a new tax system.
1.142 The guidelines will look to remit penalties where taxpayers and their agents make a genuine attempt to meet their obligations, but will maintain an appropriate level of penalty where taxpayers don’t make an effort to do the right thing. For taxpayers that deliberately flout the law or participate in fraudulent activity, the maximum penalties will be imposed with prosecution action being taken in appropriate cases.
267 Those extracts do not directly address the question whether the fact that a taxpayer has a reasonably arguable position is a relevant or irrelevant consideration in exercising the discretion to remit. Equally, however, there is no suggestion in any of those materials that that consideration has become an irrelevant consideration as a result of the reforms. Furthermore, the consideration of “a taxpayer’s particular circumstances” as referred to in [1.140] is sufficiently broad as to encompass that consideration.
268 For all these reasons, therefore, I consider that the various extrinsic materials and overall legislative history are consistent with the view I have expressed above.
269 It is now appropriate to address the Commissioner’s second ground of appeal.
Did the Tribunal apply the incorrect test?
270 As noted above, the Commissioner’s alternative argument is that the Tribunal applied the incorrect test in determining to remit the administrative penalty from 25 percent to zero. Relying again on Traviati at [88], the Commissioner argued that the Tribunal applied the wrong test because it treated its finding that Lakes had a reasonably arguable position on Issue 5 as determinative of the question of the application of s 298-20, without addressing or making any findings on Lakes’ particular circumstances.
271 Lakes described the Commissioner’s alternative ground of appeal as “hopeless” and relied on the fact that the Tribunal explained that it was inappropriate to penalise Lakes in respect of Issue 5 having regard to the nature of that particular issue and the object of the penalty regime.
272 The Tribunal’s reasons for remitting the penalty on this issue to zero are set out in R[208] and [209] as follows:
A. The law
Section 298-20 of Schedule 1 to the TA Act provides that the Commissioner may remit all or part of a penalty. Section 298-20 does not set out any guidelines as governing the exercise of the discretion. Given the provisions relating to the imposition of penalties, there would clearly need to be circumstances that could be regarded as mitigating the taxpayer’s behaviour in some way while bearing in mind the purpose for which income tax is imposed and paid and the role of ITAA36, ITAA97 and the TA Act in supporting that purpose. As Collier J said in Federal Commissioner of Taxation v Dixon (Trustee):
“... while the purpose of a penalty regime is obviously to deter infringement of the law, particularly in an environment of self-assessment, the importance of conduct of taxpayers in attempting to comply with the legislation and their taxation obligations is clear from the legislation itself and ... Explanatory Memorandum 2000. ...”
B. Consideration
The taxation scheme is now based on a philosophy of self-regulation. A taxpayer such as Lakes submits returns on the basis that they contain information that is correct and on the understanding that the Commissioner will not, unless conducting an audit, generally question it in making an assessment on the basis of it. In light of these matters and with one exception, I do not consider that there are grounds for remitting the penalty and affirm the Commissioner’s decision regarding penalty. The one exception relates to its claim in relation to Issue 5. I have found at [196] that there was room for a rational argument that, viewed objectively, Lakes was entitled to a deduction in relation to that issue. In view of the object of the penalty regime, that seems to me to justify the remission of the penalty imposed in relation to its claim for a deduction of $1,275,800 in the 2003 income year for expenditure in relation to its obligations under s 173 of the PE Act.
Consideration
273 The Tribunal’s reasoning on this matter is scant, but I do not consider that it reveals that the wrong test was applied.
274 First, it is significant that in summarising the relevant legal principles the Tribunal acknowledged in R[208] that there needed to be circumstances that could be regarded as mitigating the taxpayer’s behaviour in some way. The Tribunal clearly appreciated that the particular circumstances of the taxpayer were relevant (even though that precise language was not used). The point is reinforced by the Tribunal’s reference in [208] to the decision of Collier J in Dixon at first instance, where the importance of the conduct of taxpayers was emphasised, together with the purpose of the penalty regime being to deter infringement in an era of self-assessment.
275 Secondly, in the appeal to the Court, the Commissioner did not point to any other specific matters appertaining to Lakes’ particular circumstances, such as its taxation compliance history, which ought to have been weighed by the Tribunal in addition to the matters which are referred to in R[209]. The Tribunal’s obligation to have regard to a taxpayer’s particular circumstances in deciding whether or not to exercise the discretion under s 298-20 must be guided in large measure by the way in which the case is presented to the Tribunal. The Tribunal plainly gave considerable weight to its finding that Lakes had a reasonably arguable position. In my view the Commissioner has failed to establish any appellable error in the Tribunal’s analysis and findings, particularly when the Commissioner was unable to point to any other aspect of Lakes’ particular circumstances which ought to have been taken into account by the Tribunal but was not.
276 For all these reasons, I would make the following orders:
(a) in VID 520 of 2012, the appeal should be dismissed and Lakes ordered to pay the Commissioner’s costs; and
(b) in VID 521 of 2012, the appeal should be dismissed and the Commissioner ordered to pay Lakes’ costs.
| I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths. |
Associate:
Dated: 24 May 2013
