FEDERAL COURT OF AUSTRALIA

Commissioner of Taxation v Miniello [2008] FCA 397

INCOME TAX – penalty tax – assessment to penalty tax in relation to a determination disallowing a tax benefit under Pt IVA of the Income Tax Assessment Act 1936 (Cth) – whether s 224(2) applicable

Income Tax Assessment Act 1936 (Cth) ss 177C(1), 177F(1), 177D, 177F(1), 224(1), 224(2), 226, 226L, 226L(c)

Starr v Commissioner of Taxation of the Commonwealth of Australia [2007] FCA 23

Commissioner of Taxation v Starr [2007] FCAFC 204

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v JOHN MINIELLO, BERNARD RICHARDS and DOUGLAS ROBERT BURROWS

WAD 139 OF 2007

SIOPIS J

11 MARCH 2008

PERTH

THE COURT ORDERS THAT:

1.                  The decisions of the Administrative Appeals Tribunal, dated 25 June 2007, that no penalties are to be imposed on any of the respondents under s 224(2) of the Income Tax Assessment Act 1936 (Cth) be set aside and the applicant’s decision to assess each of the respondents with additional tax under s 226 of the Act be affirmed.

2.                  The question of costs be adjourned to a date to be fixed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     This is an appeal on a question of law from the decision of the Administrative Appeals Tribunal (the Tribunal).

2                     Each of the respondent taxpayers claimed income tax deductions for the year ending 30 June 1997 for expenses that each had incurred as a licensee of Oracle Information and Communications Pty Ltd, arising from his participation in the Oracle International Project.

3                     The applicant (the Commissioner) made determinations under s 177F(1) of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (the Act) that each respondent had obtained, in connection with a scheme, a tax benefit within the meaning of s 177C(1) and s 177D.  The Commissioner issued amended assessments to give effect to the determinations referred to by disallowing the claimed deductions and increasing each respondent’s taxable income for the 1997 income tax year.  The amended assessments also included, by way of penalty, additional tax.

4                     Each of the respondents objected to the amended assessment, and subsequently appealed against the Commissioner’s disallowance of the objection.  Each appeal found its way to the Tribunal.

5                     The Tribunal decided that the provisions of Pt IVA of the Act applied to disallow the claimed deductions for the income tax year ended 30 June 1997, except for certain actual cash payments which had been made.  Having made that determination, the Tribunal went on to deal with penalty tax and said as follows:

The Tribunal accepts that the [taxpayer’s] actual or subjective purpose in entering into the scheme was, as set out above, to obtain assessable income.  Accordingly, in light of the decisions in Starr and Hopkins, the Tribunal concludes that the [Commissioner] should not have imposed penalties under section 224(2) of the Income Tax Assessment Act 1936.  The Tribunal notes that the decisions in the Starr and Hopkins matters are on appeal to the Full Federal Court and in the event that the decisions at first instance are overturned then, if this takes place before amended assessments are issued by the [Commissioner] in the [sic] accordance with the Tribunal’s decision as set out below, the [Commissioner] should have regard to the decision of the Full Federal Court in those matters.

6                     The Tribunal decided that:

(a)               The deductions claimed by each respondent were to be disallowed except for actual cash payments made by each respondent.

(b)               No penalties were to be imposed on each respondent under s 224(2) of the Act.

7                     The Commissioner appealed against the Tribunal’s decision in respect of penalty tax.

8                     In the amended notice of appeal, the Commissioner has identified the following questions of law.

9                     First, whether the Tribunal erred in law:

(a)                by not deciding that a penalty was imposed on each respondent under s 226 of the Act, having decided that the Commissioner was entitled to make the determination under s 177F(1) in respect of the claimed deductions, except for actual cash payments; and

(b)               by deciding that no penalties are to be imposed on each respondent under s 224(2) of the Act, which is not a provision that imposes additional tax liability.

10                  Secondly, whether the Tribunal erred by failing to make any decision on each respondent’s additional tax liability.

11                  The orders sought by the Commissioner are that:  the decision of the Tribunal, that no penalties are to be imposed on each respondent under s 224(2) of the Act, be set aside and the Commissioner’s assessment of each respondent with additional tax under s 226 of the Act be affirmed.

12                  The issue, therefore, on the appeal is whether the Tribunal erred in determining that s 224(2) of the Act was capable of application in the circumstances, so as to preclude the imposition of penalty tax.

13                  In my view, the Tribunal erred in its construction of the Act and in its reliance upon, and reference to, the case of Starr v Commissioner of Taxation of the Commonwealth of Australia [2007] FCA 23 (Starr) as being applicable in the circumstances of each of the appeals.

14                  Section 224(2) of the Act is not the relevant section under which penalties are imposed in circumstances where a determination has been made under Pt IVA.  The relevant penalty section where there has been a determination under Pt IVA, is s 226.

15                  The case of Starr which was referred to by the Tribunal, dealt with a penalty imposed by reference to a different section of the Act, namely, s 226L.  The reference in that decision to s 224(2) of the Act arises by reason of the reference in s 226L(c) to a “tax avoidance scheme” within the meaning of s 224(1).  That subsection in turn invokes s 224(2), which contains the definition of the “tax avoidance scheme” referred to in s 224(1).  The imposition of additional tax by way of penalty in respect of the “tax avoidance scheme” referred to in s 224(2) and s 226L involves different considerations as to the taxpayer’s intention, to the imposition of penalty tax under s 226 in relation to Pt IVA determinations (see Commissioner of Taxation v Starr [2007] FCAFC 204).

16                  Accordingly, the Tribunal made an error of law in the construction of the Act.  Therefore, the appeal succeeds.

Associate:

Dated:         27 March 2008