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CODY & ANOR v FC of T

Members:
Dr G Hughes M

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2007] AATA 1342

Decision date: 21 May 2007

Dr G Hughes (Member)

1. These two applications were heard by the Tribunal together as they related to identical decisions by the Commissioner of Taxation (the Respondent) dated 27 March 2006. The Respondent imposed an administrative penalty on Mr Shane Cody and Mrs Jennifer Cody (the Applicants), for their failure to lodge their 2004 income tax returns, pursuant to section 284-75(3) of Schedule 1 to the Taxation Administration Act 1953 (the 1953 Administration Act)..

2. Mr Shane Cody appeared on his own behalf and on behalf of Mrs Jennifer Cody at the hearing on 30 April 2007. Ms Jenny

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Proimos of the Australian Taxation Office (ATO) appeared for the Respondent.

3. The Applicants purchased a property in Wagner Road, Clayfield, Queensland, on 15 September 1999 for $800,000. They subsequently sold the property on 15 November 2003 for $1,440,000. This transaction gave rise to a capital gains tax issue in respect of the year ending 30 June 2004.

4. The date for lodgement of income tax returns for the 2003/2004 financial year was 31 March 2005.

5. On 14 March 2005, the Respondent informed the Applicants of the need to consider the assessability of the property for capital gains tax purposes. The letter included the following advice to each Applicant:

"Given you may soon be lodging your 2004 tax return, please consider whether you have made a capital gain through the disposal of this property.

…

If, after reading this letter, you believe that you have made a capital gain from the sale of property you may need to include any gain in your income tax return for 2004."

6. The Applicants failed to lodge their respective income tax returns by 31 March 2005.

7. The Respondent sent a lodgement demand letter to each Applicant on 18 April 2005, which stated:

"The [2003/2004] return is now overdue and should be lodged within 21 days of the date of this letter."

8. The Respondent submits that the Applicants failed to respond to this demand. On 10 May 2007, the Respondent sent a further letter, entitled Final Notice to Lodge Income Tax Return, to each Applicant. The letter warned of court fines and penalties which could be imposed for failing to lodge an income tax return on time, and stated the following in relation to default assessments:

"… Under section 167 of the Income Tax Assessment Act 1936 (ITAA 1936) if the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income; the Commissioner shall, from any information in his possession, make an assessment of the amount of the taxable income of any taxpayer, and of the tax payable thereon for the purpose of section 166 of the ITAA 1936."

9. Section 167 of the Income Tax Assessment Act 1936 (the 1936 Assessment Act) provides:

"If:

  • (a) any person makes default in furnishing a return; or
  • (b) the Commissioner is not satisfied with the return furnished by any person; or
  • (c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;
the Commissioner may make an assessment of the amount upon which in his judgement income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166."

10. In the absence of any apparent response from the Applicants, the Respondent issued a default assessment on 30 May 2005 under section 167 of the 1936 Assessment Act. Having determined a gross capital gain of $640,000, the Respondent issued a Notice of Assessment on 23 June 2005 to the Applicants for a net capital gain of $160,000 each. The Respondent issued a general interest charge to each Applicant, being $1,651.15 in the case of Shane Cody and $1,497.95 in the case of Jennifer Cody, and imposed a 75 per cent administrative penalty on each Applicant.

11. With respect to the administrative penalty, section 284-75(3) of Schedule 1 to the 1956 Administration Act provides:

"You are liable to an administrative penalty if:

  • (a) you fail to give a return, notice or other document to the Commissioner by the day it is required to be given; and
  • (b) that document is necessary for the Commissioner to determine a tax-related liability of yours accurately; and
  • (c) the Commissioner determines the tax-related liability without the assistance of that document."

12. 

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As to the level of applicable penalty, item 7 of section 284-90(1) of Schedule 1 to the 1956 Administration Act provides that the base penalty amount for an administrative penalty under subsection 284-75(3) is 75 per cent of the tax-related liability concerned.

13. The tax shortfall penalty, which is the subject of these proceedings, was duly calculated at the rate of 75 per cent of each Applicant's tax-related liability. This quantified at $60,054.10 for Shane Cody and $54,480.65 for Jennifer Cody.

14. In its reasons for decision, the Respondent explained the imposition of the 75 per cent penalty as follows (T-docs, p23):

"…

Intentional disregard

Where this shortfall amount results from an intentional disregard of a taxation law by a taxpayer or their agent, base penalty can be applied at the rate of 75% of the shortfall amount.

As noted in paragraph 8 of Taxation Ruling TR94/4, a penalty for intentional disregard can be imposed where a taxpayer has intentionally disregarded the ITAA or the regulations. This requires a finding that the taxpayer consciously decided to disregard clear obligations imposed on the taxpayer by the ITAA or the regulations. This finding may be:

  • • based on direct evidence of the taxpayer's intention (such as an admission); or
  • • inferred from all the facts and circumstances surrounding the taxpayer's behaviour.

You failed to furnish an income tax return in which you had derived taxable income. This resulted in a shortfall amount, as it was determined that there was tax-related liability in your deemed assessment.

In failing to furnish the Commissioner with your income tax return, we believe that you and your tax agent showed an intentional disregard toward the obligations imposed upon you in regard to the ITAA or the regulations. We have made this decision based on the following factors:

  • • You have not lodged your 2004 income tax return.
  • • A demand for you to lodge your 2004 return was issued on 18 April 2005.
  • • A final demand letter requesting lodgement of your 2004 return was issued on 10 May 2005.
  • • Despite receipt of our letters you have not responded to our numerous requests for further information.
  • • In particular, you have failed to furnish the Commissioner with your income tax return, despite deriving taxable income during the 2004 financial year.

This shows an intentional disregard of a taxation law by failing to furnish the Commissioner with your 2004 income tax return. Accordingly the base penalty will therefore be imposed on this shortfall amount at the rate of 75%.

Remission of penalty

Under section 298-20 of Schedule 1 of the [Taxation Administration Act] 1953, the Commissioner may remit all or part of a penalty imposed on a shortfall amount. Taxation Ruling TR 94/7 provides guidelines as to when this discretion may be exercised. The ruling states that the discretion to remit tax penalty should be exercised in only those exceptional cases where, having regard to all the circumstances, the application of penalty would provide a clearly unreasonable or unjust result.

Based on the guidelines in TR 94/7, we do not consider that the application of penalty in your case would provide an unreasonable or unjust result. Therefore, the penalty imposed on your shortfall amount will not be remitted.

…"

15. On 5 July 2005, the Applicants objected to their 2004 assessments on the grounds that the information used to formulate the assessments was incorrect and they requested a review of the assessments.

16. Mr Cody apologised for his tardiness and explained:

"I do not have an excuse for such tardiness, save that I work a normal 10 hour job, have

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set up 3 businesses in the last two years and have been travelling overseas trying to setup another business as well as coaching girls basketball at the state championship level in Victoria. Unfortunately, I have little time for sleep let alone anything else.

Once again, I apologize for not getting back to you, and I have this day deposited $50,000 into the ATO bank account as a sign of good faith that I am not trying to avoid my taxation liabilities."

17. Mrs Cody apologised for her tardiness and explained:

"Unfortunately. I do not have an excuse for such lateness, although I would like to say that I look after three businesses as well as the home and it leaves me little time for much else in life. While this is no excuse I hope that you understand that I have been very busy and not managing my affairs as well as I should."

18. On 28 March 2006, the Respondent partially allowed the objections by the Applicants. The Respondent took account of details subsequently provided by the Applicants as to stamp duty, agents' commission and legal fees to be included in the cost base. It adjusted the original default determination of a gross capital gain of $640,000 to $540,375. Each Applicant's share of the capital gain was $270,188. After applying the 50 per cent discount under section 115-100 of the Income Tax Assessment Act 1997, the net capital gain was reduced from $160,000 to $135,094 for each Applicant.

19. In addition to reducing each Applicant's share of capital gain by $24,906, the Respondent reduced the penalty rate from 75 per cent to 25 per cent on the reduced shortfall, in accordance with the Commissioner's discretion under section 298-20 of Schedule 1 to the 1956 Administration Act. This reduction resulted in Mr Cody's tax shortfall penalty being reduced from $60,054.10 to $13,276.43 and Mrs Cody's tax shortfall penalty being reduced from $54,480.65 to $12,359.64.

20. The Respondent set out the basis for reducing the tax shortfall penalty from 75 per cent to 25 per cent in its Reasons for Decision as follows:

"In determining the extent to which the penalty should be remitted we have considered the following factors:

  • • you paid a significant amount of money in good faith towards your outstanding tax liabilities resulting from the audit;
  • • you have arranged lodgement of all outstanding and current tax returns;
  • • if you had lodged your income tax on time and had failed to include the capital gain as assessable income in the return, the penalty would have been imposed either at 25% (for failure to take reasonable care or for not having a reasonable arguable position) or at 50% (for acting recklessly);
  • • you have shown remorse over the lateness of your lodgement and you intend to make sure that all your tax affairs are kept up-to-date in future; and
  • • as a result of your objection, your capital gain will be decreased.

Based on the above factors and on the guidelines provided in Taxation Ruling TR 94/7, we consider that the balance of the tax shortfall penalty imposed for the 2003-04 income year should be remitted to 25%."

21. The Applicants remained dissatisfied with the reduced 25 per cent penalty and applied for a review before this Tribunal on the basis that the ATO did not take into consideration all information that should have been available to them. Specifically, the Applicants referred to a handwritten notation on a letter dated 24 February 2005 which was faxed to the Respondent, and a letter to the Respondent dated 21 April 2005, which advised that the Applicants were overseas and would attend to their tax affairs upon return in June or July 2005.

22. The handwritten notation by Mr Cody appeared at the foot of a letter from the Respondent to Mr Cody, which related to a delay in the lodgement of Mr Cody's income tax return for the year ending 30 June 2003. The notation read:

"Will attend to tax return when I come back from o'seas in June 2005."

23. The letter dated 21 April 2005 from Mr Cody, which included the tax file numbers of

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both Applicants and hence could be interpreted as being sent on behalf of both Applicants, stated:

"Refer to your letter of 3rd April 2005 and my fax of 21 April 2005.

I will attend to tax returns for above on my return from China Trade fairs Indonesia and Singapore in late June/July 2005."

24. Ms Proimos emphasised that Mr Cody provided these undertakings in response to correspondence from the Respondent about his income tax return for the year ending 30 June 2003. This was not the income tax return which was the subject of the disputed tax shortfall penalty and indeed the Applicant's correspondence involved a different office and different business unit of the Respondent. The Applicants did not contest this conclusion at the hearing before the Tribunal.

25. The Applicants nevertheless contended that the 25 per cent penalty imposed by the Respondent was unduly harsh. Mr Cody essentially relied upon the mitigating circumstances set out in his letter to the Respondent dated 5 July 2005. In the letter, he emphasised that he had been a good taxpayer in the past. He stated that he had made an honest mistake as he had been over worked and under pressure at the time. He also said that he had made a genuine attempt to keep the Respondent informed of his whereabouts and his intentions in relation to the lodgement of the income tax returns in question.

26. The Respondent contended that due allowance had already been made for these mitigating factors in reducing the penalty from 75 per cent to 25 per cent.

27. Ms Proimos referred the Tribunal to the observations of Senior Member Pascoe in
Re Otway Pastoral Pty Ltd and Commissioner of Taxation 2005 ATC 2219; [2005] AATA 649. Albeit in the context of a failure by the taxpayer to comply with a different section of the Act, the Senior Member stated (at paragraph 10):

"Whilst [section 298-20 of Schedule 1] does not contain any guidelines as to appropriate circumstances in which the discretion should be exercised it is clear that remission should be granted only where special circumstances existed, failure to lodge was due to factors outside the control of the taxpayer and all reasonable mitigating steps were taken by the taxpayer."

28. Similarly, in
Re Hobart Central Childcare Pty Ltd and Commissioner of Taxation 2005 ATC 2351; [2005] AATA 1027, Deputy President Forgie stated (at paragraph 205):

"Section 298-20 of Schedule 1 to the [Taxation Administration Act 1953] provides that the Commissioner may remit all or part of a penalty. It 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 the [Income Tax Assessment Act 1936] and [Taxation Administration Act 1953] in supporting that purpose."

29. It is the Tribunal's view that the reduction by the Respondent of the penalty imposed under section 284-75(3) of Schedule 1 to the 1953 Administration Act, namely from 75 per cent to 25 per cent of the tax related liability, was an appropriate exercise of discretion under section 298-20 of Schedule 1. In reducing the penalty to 25 per cent, the Commissioner has, quite appropriately, already taken account of factors such as the taxpayer's good record and good intentions. A further reduction in the penalty is not warranted.

30. The Tribunal does not consider that special circumstances exist in this case which would entitle the Applicants to greater relief than the reduction in penalty already granted. The fact that a taxpayer is busily occupied with his or her own affairs cannot, of itself, justify a failure to comply with obligations arising under taxation legislation. Similarly, the fact that a taxpayer was overseas at the time lodgement was due, thus resulting in some inconvenience in complying with lodgement obligations, cannot excuse any such failure to comply.

31. The Tribunal is not convinced that the correspondence from Mr Cody to the Respondent, first brought to the Respondent's attention for the purposes of these proceedings at the preliminary conference on 2 August 2006, would have materially affected the

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decision made by the Respondent if it had been brought to its attention beforehand. Regardless of whether the letters in fact had related only to the year ending 30 June 2003, and regardless of whether the Respondent should or should not have cross-referenced the communications with the matters currently in dispute and interpreted them as referring also to the financial year ending 30 June 2004, the Tribunal is not satisfied that the correspondence provides adequate grounds for relieving the Applicants of their responsibility to lodge their income tax returns on time. It is not for a taxpayer to disregard a deadline imposed by legislation (or an extension of time granted by the Respondent) on the basis that immediate compliance is inconvenient, and that the necessary formalities will be addressed at a later time more suitable to the taxpayer. The Tribunal is not satisfied that Mr Cody's cursory notes to the Respondent represent a bona fide attempt to comply with the Applicants' statutory obligations or to mitigate any inability to comply.

32. For the above reasons, the Tribunal affirms the decision under review.


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