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SHARKEY v FC of T

Members:
P Taylor SC SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2007] AATA 1435

Decision date: 18 June 2007

P Taylor SC (Senior Member)

1. From 1992 until about February 2005, Mr Sharkey carried on a practice as a solicitor in Frankston, Victoria. On 1 July 2000 a new tax system, of which the A New Tax System (Goods and Services Tax) Act 1999 ("the GST Act") was part, came into operation. Before it started Mr Sharkey obtained the required registration. He also installed new computer equipment and software for the purpose of facilitating his compliance with the reporting requirements of the new tax system.

2. Unfortunately, the purpose was not fulfilled. Indeed, he did not lodge any business activity statements (the approved reporting form) until December 2004. His non-compliance with the reporting requirements was, therefore, significant and prolonged. It attracted penalties totalling $10,450. In May 2006 the Commissioner of Taxation refused to remit the penalties. Mr Sharkey has applied to the Tribunal to review the Commissioner's decision.

The statutory reporting obligations

3. The principal reporting requirement arose under section 31-5 of the GST Act. It obliges entities that are, or are required to be, registered under Part 2-5 of the GST Act, to give the Commissioner of Taxation a GST return for each tax period. The dictionary in section 195-1 of the GST Act defines a GST return as one that complies with all the requirements of sections 31-15 and 31-25 of the GST Act as well as the requirements of section 388-75 in Schedule 1 of the Taxation Administration Act 1953. Section 31-15 of the GST Act requires the GST return to be in the approved form. The obligation to provide a GST return applies whether or not the entity's net amount for the tax period is zero, or the entity is liable for GST on any taxable

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supplies attributable to the tax period. In the case of quarterly tax periods the GST return must be provided within 28 days after the end of the quarter: section 31-8 of the GST Act.

4. Section 16-150 of Schedule 1 to the Taxation Administration Act 1953 provides that where an entity must pay the Commissioner an amount (including a nil amount) under Division 12 of the Schedule, it must notify the Commissioner of the amount on or before the due date for payment. This notification must be in the approved form and lodged with the Commissioner. A notice or return satisfies this requirement if it is in a form approved by the Commissioner, and otherwise complies with section 388-50 of Schedule 1 of the Taxation Administration Act 1953. A business activity statement is an approved form - for the purposes of both Pay As You Go and GST taxation notices and payments.

The Applicant's delay in providing business activity statements

5. Mr Sharkey's first business activity statement, for the quarter ended September 2000, was due by the end of October or early November 2000. In fact he did not lodge any quarterly business activity statements at all until 29 December 2004. By 1 February 2005 he had lodged business activity statements for the quarters from October 2000 to June 2004. (The business activity statement for the September 2000 quarter appears to have been overlooked at the time. He did not lodge that business activity statement until November 2005.) By February 2005 further quarterly business activity statements had become due. Nevertheless, Mr Sharkey did not lodge business activity statements for the quarters ended December 2004 and March 2005 until January 2006. He did not lodge a business activity statement for the quarter ended September 2004 until October 2006.

The penalty provisions and related correspondence with the Commissioner

6. Section 286-75(1) of Schedule 1 to the Taxation Administration Act 1953 imposes an administrative penalty where a taxpayer fails to provide the Commissioner with required returns and notices in a timely fashion. Section 286-80 of Schedule 1 of the Taxation Administration Act 1953 outlines the manner in which the administrative penalty referred to in section 286-75(1) is to be calculated. A taxpayer who is neither a "medium withholder" or "large withholder" (that is, Mr Sharkey) is liable to a base penalty amount of one penalty unit for each 28 day period of delay in lodgment. This is subject to a maximum of five penalty units. Section 4AA of the Crimes Act 1914 provides that $110 is the value of a penalty unit.

7. Where liability for such an administrative penalty has otherwise been imposed the Commissioner must give a taxpayer written notice of the liability: section 298-10 of Schedule 1 of the Taxation Administration Act 1953. The Commissioner may also exercise a discretion to remit part or all of the penalty. If the Commissioner decides not to remit the penalty, or to remit only part of it, the Commissioner must give the taxpayer written notice and reasons for the decision. If the unremitted penalty is more than two penalty units a dissatisfied taxpayer may object to the Commissioner's decision: see section 298-20 of Schedule 1 of the Taxation Administration Act 1953. The taxpayer's objection must be lodged with the Commissioner within the time permitted by section 14ZW of the Taxation Administration Act 1953. In the absence of any more specific provision applying, the objection must be lodged within 60 days after notice of the taxation decision has been served on the taxpayer: section 14ZW(1)(bb) of the Taxation Administration Act 1953.

8. The Commissioner wrote to Mr Sharkey on 15 April 2004 drawing his attention to the failure to lodge business activity statements for the period from 1 July 2000 to 31 December 2003. The letter also drew his attention to the penalties that applied for a failure to lodge the required statements. Later in 2004 Mr Sharkey was prosecuted for failure to lodge his individual income tax returns for the years ended 30 June 2000, 30 June 2001, 30 June 2002 and 30 June 2003. He was convicted, and fined $900 on 30 November 2004. Following that conviction, on 9 December 2004 the Commissioner sent Mr Sharkey four notices, under section 298-10 of Schedule 1 to the Taxation Administration Act 1953, advising the imposition of penalties for the failure to lodge business activity statements for the quarters referred to in the 15 April 2004 letter, and for the quarters ended March, June and September

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2004. By December 2004 each of the required statements (other than that for the September 2004 quarter) was more than five months overdue. Consequently the maximum penalty applied in relation to those statements. Mr Sharkey did not, at that time, make any application for remission of the administrative penalties that had been imposed.

9. On 29 December 2004 Mr Sharkey did lodge some of the overdue business activity statements. It is reasonable to infer that he did so in response either, to the Commissioner's letters or to the prosecution proceedings that had resulted in his November 2004 conviction. In any event, by February 2005 Mr Sharkey had lodged all but one of the business activity statements due up to the period ended 30 June 2004.

10. Some eight months later, on 18 August 2005, the Commissioner wrote again to Mr Sharkey. This time the letter drew attention to his apparent failure to lodge any of the quarterly business activity statements for the period from 1 July 2004 to 30 June 2005. On 4 October 2005 the Commissioner sent Mr Sharkey a further notice under section 298-10 of Schedule 1 to the Taxation Administration Act 1953, advising that additional administrative penalties had been applied in respect of outstanding business activity statements (that is, for the quarters ended September and December 2004 and March and June 2005. The maximum penalty again applied - except in relation to the quarter ended 30 June 2005).

The Commissioner's refusal to remit penalties and the Applicant's objection

11. The total amount of the administrative penalties imposed by section 286-75 of Schedule 1 to the Taxation Administration Act 1953, in relation to the period from July 2000 until June 2005, was $10,670. On about 30 January 2006, after having attended to the lodgment of all but one of the outstanding business activity statements, Mr Sharkey wrote to the Commissioner requesting consideration be given to remitting the administrative penalties that had been imposed. He outlined 15 relevant considerations. These were somewhat repetitive and can be accurately summarised as involving the following:

  • (a) difficulties with the honesty, competence and reliability of persons he had employed to attend to his business accounting;
  • (b) the pressure of work associated with his busy criminal and family law litigation practice as a solicitor;
  • (c) pressures of work and related financial difficulty associated with his involvement in a farming partnership;
  • (d) a claimed family, and personal, history of alcoholism and depression;
  • (e) a deterioration in his physical health - which had led to his decision in late 2004 or early 2005 to cease practise as a solicitor and significantly modify his personal lifestyle.

12. In drawing attention to these various matters Mr Sharkey contended he had a mental illness which led to his inability to attend to his personal affairs, specifically including his taxation obligations. Indeed, he said his psychological condition was such that he had not been able to open his personal mail for long periods. In some instances he had left mail unopened for two to three years. This included all mail from the Australian Taxation Office.

13. The Commissioner responded to this request by a letter dated 15 February 2006. The Commissioner remitted the penalty that had been imposed for delay in lodging the business activity statement for the quarter ended 30 June 2005 (on the ground that Mr Sharkey had ceased practice as a solicitor at the end of February 2005). However, penalties in relation to all of the other lodgment delays were maintained. The total amount of those penalties was $10,450.

14. On 11 April 2006 Mr Sharkey lodged an objection against the Commissioner's decision refusing to remit those penalties. In this letter he acknowledged his poor compliance history and his failure to contact the Australian Taxation Office at any time to seek an extension of time for lodgment of the required returns. But he again sought to attribute this to what he described as his "general psychological state whereby my personal affairs were neglected". He referred to an accompanying report by a psychologist, Ms Judith Cahill. He said that the psychologist's report evidenced a history of overwork and

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poor coping skills under pressure. This had led to a neglect of his health and well-being and a loss of control over his personal affairs. He said that a detailed history of debts and disputes that was appended to the report provided evidence of his inability to deal with both business and personal financial matters. Nevertheless, he asserted that he had not "deliberately and wilfully" failed to comply with his taxation obligations. He illustrated that assertion by claiming to have prepared (although not actually lodged) his tax returns before he became aware of relevant notices from the Australian Taxation Office.

15. Mr Sharkey's objection was dealt with by the Commissioner, and rejected, in a decision made on 2 May 2006. In that decision the Commissioner acknowledged Mr Sharkey's personal difficulties but regarded these as insufficient to justify remission of the penalties. The Commissioner observed that simultaneously with neglecting his obligations in relation to lodging business activity statements, Mr Sharkey had continued to conduct his professional practice and operate the farm property. That fact, together with Mr Sharkey's previous acknowledgement that he had refrained from opening personal mail, including correspondence from the Australian Taxation Office, for substantial periods justified the conclusion that he was consciously selective in the matters to which he chose to attend during the relevant period. Furthermore, the Commissioner noted that the lodgment delay was very substantial. Notwithstanding that substantial delay, which implied Mr Sharkey's probable knowledge of his non-compliance, there was no evidence that he had put in place alternative arrangements designed to ensure that he complied with his taxation reporting obligations in a timely manner. Ultimately, the Commissioner concluded that Mr Sharkey had failed to demonstrate that the lodgment delay occurred because of circumstances beyond his control. He had also failed to demonstrate that he had taken reasonable steps to attempt to achieve compliance or to obtain appropriate extensions of time. Accordingly, the Commissioner disallowed Mr Sharkey's objection.

The review application to the Tribunal

16. On 28 June 2006 Mr Sharkey applied to the Tribunal, pursuant to sections 14ZZ and 14ZZC of the Taxation Administration Act 1953, for a review of the Commissioner's 2 May 2006 decision. In his application for review Mr Sharkey contends that the Commissioner misunderstood the basis of his objection, failed to take into account the matters on which he sought to rely and failed to properly exercise the discretion.

The Tribunal's review powers and functions

17. In the review proceedings, section 14ZZK of the Taxation Administration Act 1953 imposes on a taxpayer "the burden of proving that" the Commissioner's decision "should not have been made or should have been made differently". This express imposition of a burden of proof involves a significant departure from the position that ordinarily applies in the exercise of the Tribunal's review function. Under subsection 43(1) of the Administrative Appeals Tribunal Act 1975, "for the purpose of reviewing a decision, the Tribunal may exercise all the powers and discretions … conferred by any relevant enactment on the person who made the decision". This has consistently been regarded as rendering it inappropriate to treat an applicant for review as subject to any legal onus of proof:
Bushell v Repatriation Commission (1992) 175 CLR 408 at 424, 425;
McDonald v Director-General of Social Security (1984) 6 ALD 6. In
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60; 24 ALR 577 at 589 the Federal Court declared that:

"the Tribunal is not restricted to consideration of the questions which are relevant to a judicial determination of whether a discretionary power allowed by statute has been validly exercised. Except in a case where only one decision can lawfully be made, it is not ordinarily part of the function of a court either to determine what decision should be made in the exercise of an administrative discretion in a given case or, where a decision has been lawfully made in pursuance of a permissible policy, to adjudicate upon the merits of the decision or the propriety of the policy. That is primarily an administrative rather than a judicial

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function. it is the function which has been entrusted to the Tribunal.

The question for the determination of the Tribunal is not whether the decision which the decision-maker made was the correct or preferable one on the material before him. The question for the determination of the Tribunal is whether that decision was the correct or preferable one on the material before the Tribunal."

18. The Administrative Appeals Tribunal Act 1975 does apply to review proceedings initiated by an application under sections 14ZZ and 14ZZC of the Taxation Administration Act 1953. But it applies subject to the modifications set out in sections 14ZZB to 14ZZM: see section 14ZZA of the Taxation Administration Act 1953. Those provisions include section 14ZZJ of the Taxation Administration Act 1953, which does not expressly alter the powers conferred on the Tribunal by subsection 43(1) - despite making a specific modification to the application of parts of section 43 of the Administrative Appeals Tribunal Act 1975 relating to the content of the Tribunal's reasons. But, even though section 14ZZJ does not expressly limit the Tribunal's powers under section 43 of the Administrative Appeals Tribunal Act 1975, it is immediately followed by the explicit onus provision included in subsection 14ZZK(b)(iii). This provision, containing the emphatic declaration that an applicant "has the burden of proving" that the taxation decision "should not have been made or should have been made differently" seems to have been included for the purpose of limiting the scope of the Tribunal's review function.

19. The fact that section 14ZZK expressly imposes a burden of proof on an Applicant implies that the Tribunal must satisfy itself that the burden has been discharged. The further implication is that this requirement involves the Tribunal in making its own assessment as to whether or not the Commissioner's decision should not have been made, or should have been made differently. The fact that such an assessment is required operates as a pre-condition to the exercise of the Tribunal's powers to make a decision varying or setting aside the decision under review. And the fact that assessments of these kinds are required of the Tribunal justifies the further conclusion that section 14ZZK is intended to modify the review task that would otherwise apply.

20. But whilst that apparent statutory intention must be recognised, the difficulty remains of determining the precise nature of the assessment the Tribunal is required to make in arriving at satisfaction that the Commissioner's decision "should not have been made or should have been made differently". The discretionary power conferred on the Commissioner by section 298-20 of Schedule 1 to the Taxation Administration Act 1953 is free of any express prescriptive criteria. But the nature, both of the taxpayer's reporting obligations (as described earlier in these reasons) and the fact of the statutory penalty for non-compliance, suggest that regard must be had to both the personal circumstances of the taxpayer and to the wider public interest in promoting the proper, efficient and prompt administration of the taxation system. There is a plethora of factual circumstances that these widely different criteria potentially require, or at least permit, to be taken into account in the principled exercise of the discretion. Those circumstances may attract relative weightings that are highly impressionistic and subjective. These factors combine to highlight the likelihood of considerable difficulty in characterising any particular discretionary result as the (only) "correct" outcome in a particular case. Similarly, whilst the Tribunal may be inclined to the view that a particular outcome is "preferable" that ultimate inclination may reflect a subjective assessment of considerations that are of marginal significance and may be accompanied by actual satisfaction that the Commissioner's decision also reflects an appropriate outcome.

21. The wording of the "burden of proving" provision in subsection 14ZZK(b)(iii) of the Taxation Administration Act 1953 should be understood as recognizing that difficulty, and as explicitly contemplating the possibility of a range of different outcomes in the principled exercise of the Commissioner's remission discretion. By imposing on the taxpayer applicant a legal burden of proving that the decision "should" have been different the statutory provision implies that the Tribunal is required to be satisfied that the circumstances evidenced by the material before the Tribunal,

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evaluated in a principled exercise of the statutory discretion, convey an element of actual obligation to differ from the Commissioner's decision. The circumstances before the Tribunal may include, because of the ambit of subsection 43(1) of the Administrative Appeals Tribunal Act 1975, evidence not considered by the Commissioner. They may also include (subject to leave being granted under subsection 14ZZK(a) of the Taxation Administration Act 1953) grounds other than those the taxpayer was required to set out "fully and in detail" in their objection to the Commissioner's refusal to remit: see section 14ZU of the Taxation Administration Act 1953.

22. Because the Tribunal's review function is not limited, or at least not necessarily limited, to consideration of the matters dealt with by the Commissioner an applicant for review does not have to show that the actual decision made by the Commissioner was "wrong" - in the sense that would apply to the review of a curial discretionary decision: see
Dinsdale v R (2000) 202 CLR 321; 175 ALR 315; [2000] HCA 54; BC200006053 at [3];
Gronow v Gronow (1979) 144 CLR 513; 29 ALR 129;
House v R (1936) 55 CLR 499 at 504-5. Indeed, it may be neither necessary nor sufficient for an applicant to establish the Commissioner's "error" in that sense. This is because the Applicant's "burden of proving" relates to the result of the decision rather than to the reasons or procedure that underlie it: see
Commissioner of Taxation v Dalco 90 ATC 4088; (1989-1990) 168 CLR 614. What subsection 14ZZK(b) of the Taxation Administration Act 1953 requires is that an applicant has the burden of satisfying the Tribunal that the original decision - in the sense of the result of that decision - is not the appropriate outcome. That satisfaction may be derived from significant new or additional material that was not before the Commissioner. It may also be derived from a re-evaluation of the appropriateness of the result of the original decision, or of a different evaluation of elements of the reasoning by which the impugned result had been achieved. However derived, the satisfaction required is that the Commissioner's decision "should" have been different and in that sense is not an appropriate result of the exercise of the statutory power or discretion. The language of subsection 14ZZK(b) of the Taxation Administration Act 1953 suggests that the required satisfaction will not be attained, consistent with the apparent purpose of the "burden of proving" requirement, by an assessment that some other result of the exercise of the discretionary decision is merely marginally preferable in all the circumstances. But the practical reality in most cases is more likely to be that proper consideration of all of the material will lead the Tribunal to a state of comfortable satisfaction that a particular outcome is either "correct or preferable" in all the circumstances. Comfortable satisfaction that a different result is "preferable" will justify the Tribunal in regarding an applicant for review as having discharged the burden imposed by subsection 14ZZK(b) of the Taxation Administration Act 1953 - of showing that the taxation decision "should not have been made or should have been made differently".

The Applicant's evidence to the Tribunal

23. In the review proceedings before the Tribunal Mr Sharkey again relied on the 2 April 2006 psychologist's report by Ms Judith Cahill - the report that accompanied his 11 April 2006 objection to the Commissioner's decision. In that report Ms Cahill stated that she had interviewed Mr Sharkey on four occasions in March 2006. She prepared her report on the basis of the history he provided in the course of those interviews. Despite the significance Mr Sharkey sought to attach to it, it is very doubtful whether Ms Cahill's report has any real value other than as an abbreviated recounting of Mr Sharkey's personal history over the very substantial period from 1977 through to 2005. The report takes into account a three page list, prepared by Mr Sharkey, describing events involving his personal financial difficulties. Many of these are apparently unrelated events scattered throughout two decades prior to 1999. Those events have little, if any, real relevance to the issues arising in the review. In relation to the period from 1999 through to 2005 the list discloses that Mr Sharkey was episodically neglectful in making prompt payment of mortgage payments, rates, credit card debts and lease or hire purchase obligations. There were even instances in 2000 in which he was in arrears of fees payable to the Australian Document Exchange and had either failed to pay, or disputed, fees claimed by two barristers.

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Both of these matters would have been related to his solicitor's practice and perhaps indicate something of the difficulties he claimed to have in properly managing his affairs at the time. During 2001, according to the list, there was one occasion in which he was late in paying rent on his Mount Eliza unit. During 2003 he was pursued in relation to a number of unpaid accounts. That year he occasionally fell into arrears in the payment of rent for his Mount Eliza unit and once was even in arrears in the payment of rent for his Frankston office. During 2004 he again encountered difficulty as a result of failures to pay rent or mortgage payments and telephone account debts in a timely fashion.

24. The history revealed episodic, but not entirely infrequent, neglect by Mr Sharkey in prompt payment of such ordinary liabilities as rent, mortgage and utility expenses. This, together with Mr Sharkey's self reports of personal, relationship and professional difficulties, led Ms Cahill to believe that Mr Sharkey's "work-load and living arrangements were such that his ability to organise his affairs was severely affected". She said that there appeared to be increasing disorder in Mr Sharkey's personal affairs and that his main coping skill appeared to have been that of denial and avoidance in relation to both his business affairs and his personal relationships. These observations by Ms Cahill are hardly matters of expert opinion. They are no more than the inferences that flow naturally from knowledge of the events which Mr Sharkey had reported:
HG v R (1999) 197 CLR 414.

25. Mr Sharkey sought to characterise Ms Cahill's report as containing an expert opinion that he was suffering from a personality disorder. He suggested this in his 11 April 2006 objection to the Commissioner's decision and it underlay his contention in the Tribunal that he was simply unable to deal with the problems involved in his long period of conceded non-compliance in providing business activity statements. Notwithstanding Mr Sharkey's evidence and submissions, Ms Cahill's report does not contain any personality disorder diagnosis. She does comment on "factors … I believe may have influenced [his] behaviour and psychological state". Those factors include an opinion that Mr Sharkey has "poor coping skills under pressure" but she does not suggest that those factors, or her comments, either justify or constitute any particular diagnosis. Indeed, in relation to Mr Sharkey's initial claim (in his 30 January 2006 letter to the Commissioner) to have suffered from alcohol dependence and depression Ms Cahill properly observed that she was entirely reliant upon Mr Sharkey's own statements. That exclusive reliance made it impossible for her to provide a "definitive retrospective diagnosis" about the presence or absence of past clinical depression. However, she appears to have gone further and not merely disavowed a "definitive" diagnosis. She said in her report that "given the information provided" by Mr Sharkey she was unable to diagnose either past clinical depression or anxiety - apparently even on a provisional or "non-definitive" basis. Ms Cahill also reported that Mr Sharkey did not currently fulfil the criteria for alcohol dependence and, on the basis of his own account of his history, he had not suffered from alcohol dependence during the relevant period.

26. Properly understood, Ms Cahill's report provides no support for the view that Mr Sharkey's behaviour, relevant to his failure to lodge the business activity statements which are the subject of these proceedings, was attributable to any mental illness or other pathological condition. At most, her report merely describes the history of Mr Sharkey's busy activity in relation to both his professional practice and his personal business venture (the cattle stud). The administrative aspects of these activities ultimately came to be characterised by a lack of organisation in which his ultimate coping mechanism was one of avoidance.

27. Mr Sharkey gave evidence to the Tribunal elaborating on the extent to which his personal financial affairs had fallen into disarray. He pointed to the various rent, mortgage and other financial defaults evidenced in the attachment to Ms Cahill's report. He said these merely illustrated the extent to which he had not paid proper attention to his financial affairs. He also explained that his involvement with the Murray Grey cattle stud which he had operated, firstly from a property at Urana and later (from about 2001 until 2006) at Holbrook, was characterised by both misfortune attributable to the exigencies inherent in any rural enterprise and by administrative disarray.

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He had not maintained his membership of the Murray Grey society, he had not properly maintained his stud records and he had not even registered animals for many years.

28. Mr Sharkey said that the disorganisation and delay which characterised his personal affairs also affected aspects of his professional practice. He did not supervise staff as he should have, despite knowing that their performance was unsatisfactory. He did not follow up clients in relation to outstanding fees. He deliberately did not open some of his mail. He would open mail he knew was directly related to his legal practice but other things, such as bills, he would put aside and not open. He said he just could not bring himself to deal with the problems associated with his personal affairs. It was all beyond him. The difficulties even extended into some aspects of the management of his legal practice. Mr Sharkey maintained a trust account and was subject to annual audits as a precondition to maintaining his practising certificate. Mr Sharkey said that the audits always disclosed some administrative irregularity - though none of dishonesty or misappropriation. He claimed that in or after June 2004 either as a result of his failure to have his trust account audited or some error by the Law Institute of Victoria, he appeared not to have been issued with a practising certificate, even though he had continued to conduct his solicitor's practice. Correspondence Mr Sharkey provided after the hearing corroborated the fact, but did not further explain the circumstances, of this apparently significant irregularity related to his professional practice.

29. Mr Sharkey explained the personal and professional pressures under which he operated. His legal practice at Frankston involved a substantial amount of criminal and family law litigation. He said a significant portion of the population in the Frankston area was socially and economically disadvantaged. Most of his work was done at legal aid rates and was relatively less remunerative. He also did a substantial amount of voluntary legal aid work. His practice was very busy, one of the largest criminal practices south of the city of Melbourne. The combined effect of the volume of work, the rates he was able to charge and his own commitment to provide legal services in a disadvantaged area meant that his professional activities resulted in him overworking to the detrimental neglect of both the administrative aspects of his practice and his personal health and welfare. He said at one stage that no one who had not conducted the kind of practice with which he had been involved could understand the pressures. He described it as one of the worst jobs in Australia. By objective standards this description involves a significant element of overstatement, but it suffices to indicate the extent to which Mr Sharkey had encountered real difficulties in dealing with the inevitable pressures of, and incidental to, his professional role.

30. The pressures involved with his professional work were exacerbated by Mr Sharkey's farming activities. He explained that he had particular difficulties, involving the loss of some stock, in 2000 and 2001. This was the result of drought and rural fires. His usual pattern of activity was that every other weekend he would make a 900 km, round trip from Frankston to Urana (and after 2001 to Holbrook). He would leave Frankston on Friday afternoon and arrive late Friday night. He would work on the property all Saturday and perhaps part of Sunday. He would then drive back to Frankston on Sunday to be ready to resume his legal work the next day. This pattern of activity, which he apparently maintained throughout the whole period after July 2000, only added to the significant pressures already imposed by his professional practice.

31. Mr Sharkey explained the efforts he made, and the difficulties he had, in relation to compliance with his tax reporting obligations. The new computer system he acquired in 2000 was installed by a specialist contractor familiar with legal accounting software. Thereafter he paid an annual fee for ongoing consulting. That consulting arrangement continued until Mr Sharkey sold the practice in early 2005. The consultant's role was to provide advice to Mr Sharkey and his office staff in relation to the proper use and operation of the accounting system. Mr Sharkey said the consultant attended his office regularly to provide advice. That may have included some advice in relation to entering details into the computer system to properly record GST related matters. However, Mr Sharkey never sought the consultant's

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specific assistance in relation to complying with his lodgment obligations.

32. When the new tax system first came into operation Mr Sharkey had a full-time employee who did some of his conveyancing work and was also responsible for maintaining the office accounts. She proved not to be able to do the accounting competently. She left after about six months. In mid to late 2001 Mr Sharkey employed a retired accountant on a part-time basis. That arrangement lasted about six months before Mr Sharkey terminated his employment as a result of an irregularity, though not one involving dishonesty, in relation to some clients' trust account records.

33. During 2002 and a substantial part of 2003 Mr Sharkey had another part-time employee. She worked two to three days a week. Mr Sharkey said her sole responsibility was to look after the practice accounting. However, in his evidence to the Tribunal Mr Sharkey was critical of her performance and said that she appeared to do little work. From about the middle of 2003 Mr Sharkey employed a Ms Blair. She remained with him until he sold the practice in February 2005. Ms Blair's duties included attending to the conveyancing work in the practice as well as looking after the practice accounting. Mr Sharkey said that she was able to get the office accounting into order and ensure the trust account was properly maintained. Mr Sharkey conceded that despite Ms Blair's apparent competence he never asked her for assistance in attending to his GST returns. He said she was too busy with her other work.

34. Throughout this entire period Mr Sharkey knew that he was not complying with his GST obligations. He knew he was receiving correspondence from the Australian Taxation Office. Initially he may not have been fully aware that the mail he received related to his required business activity statements. However, after a time, he was certainly well aware that the Australian Taxation Office was sending him the forms. The problem was that his accounting records had not been properly kept and that meant providing the required business activity statements would have involved a lot of work. Whilst he was carrying on his practice at Frankston, he only set aside the time to do this work over the Christmas break period at the end of 2004.

35. Mr Sharkey had an accountant throughout the period from 2000 to 2005. This person was located in Frankston within 2 km of Mr Sharkey's office. Mr Sharkey had dealt with him for over 10 years and retained him to attend to his annual income tax return. Mr Sharkey conceded that he never asked for assistance from the accountant in relation to compliance with his GST obligations, despite the significant and prolonged difficulties he was encountering. Mr Sharkey also conceded that he never contacted the Australian Taxation Office to arrange any extension of time, disclose his difficulties or request assistance.

36. In opposition to Mr Sharkey's application the Commissioner pointed out that, whilst the discretion to remit conferred by subsection 298-20(1) of Schedule 1 of the Taxation Administration Act 1953 was not subject to any express prescriptive criteria, the Australian Taxation Office had itself published relevant policy guidelines which appropriately informed the proper exercise of the discretion. That policy was set out in chapter 98 of the ATO Receivables Policy and relevantly contained the following passages on which the Commissioner relied:

"98.4.16 Generally, remission of FTL [failure to lodge] penalty will only be granted where the delay in lodgment occurred due to circumstances beyond the control of the taxpayer or in such other circumstances, by reason of which, it would be fair and reasonable for the Commissioner to remit the penalty…

98.4.17 Full remission of FTL penalty will be granted where the taxpayer or their tax agent can establish that special circumstances (that is circumstances beyond their control) existed that directly impacted on their ability to lodge the document on time

98.4.18 Where special circumstances do not exist it may still be appropriate for the Commissioner to remit the FTL penalty, in full or in part, where it would be fair and reasonable to do so. In these cases the Commissioner will consider such factors as the length of time the document was

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overdue, the taxpayer's circumstances … the taxpayer's lodgment history and any relevant contact with the Tax Office prior to the due date of the document.

…

Circumstances beyond the control of the taxpayer

98.4.21 A taxpayer (or their tax agent) may be able to demonstrate that the difficulties they are experiencing were due to factors beyond their control and clearly could not be predicted and the taxpayer or their tax agent was not in a position to request further time to lodge…

Fair and Reasonable

98.4.23 A decision by the Commissioner to remit penalty because it is fair and reasonable must be considered in view of the legislative policy that taxpayers should be liable to a penalty if they lodge late. Not only must the exercise of the power to remit be fair to the taxpayer concerned, it must be fair to the whole community…"

37. The Australian Taxation Office policy referred to in the preceding paragraph has no legislative status. Nevertheless, it is a relevant consideration in the exercise of the remission discretion for the reasons given by the tribunal in William Vazquez & Associates Pty Ltd and Commissioner of Taxation [2005] AATA 301. In that case the Tribunal said:

"[14] Although the penalty imposed [by subsection 2876-75(1) of Schedule 1 of the Taxation Administration Act 1953] is described as an "administrative penalty" it is still a penalty and normal sentencing principles must be kept in mind when exercising the discretion as to whether to mitigate the penalty or not. In particular apart from circumstances peculiar to the individual offending taxpayer the threefold purposes of punishment must be kept in mind. Those purposes are retribution, deterrence and reformation…

[25] Principles to be applied in deciding whether to remit a penalty or not have been set out in the ATO Receivables Policy (the Policy) document. In line with previous decisions of this Tribunal that Policy should be applied so far as is consistent with the Tribunal's duty to make the best or preferable decision in the instant case - see re Drake and Minister for Immigration and Ethnic Affairs (No.2) (1978-80) at ALD 634 …

[28] In seeking to apply those principles [that is, paragraphs 98.5.18 and 98.5.21 of the Policy] to the individual circumstances of this taxpayer, I do not regard them as either derogating from or adding to general principles regarding mitigation of penalty…"

38. In support of the disallowance of Mr Sharkey's objection, and consistently with the policy referred to above, the Commissioner relies upon the decision of the Tribunal in Trpimir Domovic and Commissioner of Taxation [2005] AATA 573. That was a case involving a registered tax agent who was suffering from osteoarthritis that was reported to cause severe incapacity with intermittent bouts of depression. The Tribunal upheld the Commissioner's disallowance of the taxpayer's objection to penalties imposed for the failure to lodge business activity statements. The relevant passages of the Tribunal's reasons were as follows:

"[27] The Applicant contends that he was experiencing difficulty managing his business affairs because of his medical condition. That may be so. However, his business is that of a tax agent. By his own admission the Applicant is familiar with his reporting obligations under the relevant tax laws and the possible ramifications of failing to lodge documents within the required time. He was plainly able to earn wages and to generate income for his tax business during the relevant period. While his medical condition may have restricted his capacity in relation to certain activities, I am not persuaded that any such restriction prevented him from complying with his taxation reporting obligations…

[28] I note that even though the penalties in issue are administrative in nature, they are imposed by operation of law and are purposive for the effective operation of the taxation system. They perform a deterrent and reformative purpose. It is necessary therefore, in my opinion, to keep in mind those purposes when considering, on review,

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whether to mitigate the penalty imposed and to consider the deterrent and reformative effect of the sanction in the particular circumstances of the offending individual taxpayer.

…

[30] I am reasonably satisfied that this Applicant's capacity to perform in his work and his business as a tax agent was reduced to some degree by his medical condition. That does not equate to him being prevented from complying with his legal reporting obligations however… The simple fact is he chose to undertake work in his tax business during all relevant periods and he chose not to comply with his legal taxation reporting obligations during those periods."

39. The Tribunal's reference in Trpimir Domovic and Commissioner of Taxation [2005] AATA 573 to the taxpayer's "choice" not to lodge the required business activity statements identifies an appropriate discretionary consideration that is not confined to factual circumstances in which a taxpayer's delay or non-compliance can be objectively characterised as deliberate or defiant. The taxpayer's business activity statement lodgment obligations are fundamentally designed to facilitate the efficient and fair operation of the taxation system. They are a statutory incident of an income generating enterprise. Where a taxpayer fails to comply with their lodgment obligations there may be circumstances in which their personal circumstances, including the state of their physical and mental health, will be relevant to the principled exercise of the discretion to remit penalties. However, if the taxpayer continues to carry on their ordinary business activities, the fact that the lodgment obligation is a mandatory incident of that kind of income generating activity will, generally, result in the taxpayer's poor health and personal circumstances being accorded little weight in the principled exercise of the discretion to remit penalties. At the least this will be the case unless there is significant evidence to demonstrate that the taxpayer's personal circumstances had a direct and significant impact upon either the taxpayer's awareness of their lodgment obligations or their ability to discharge them. It is likely to be particularly the case where the taxpayer's default is prolonged and repeated. This is so because the taxpayer's continuing conduct of their income generating activities will often, and perhaps ordinarily, justify an inference of selective response to business pressures. That selective response will often be able to be characterised as one in which the practical benefits or imperatives of the taxpayer's business activities have been accorded priority over their legal obligations and the public interest that the proper operation of the taxation system is intended to serve - and which the existence of the statutory administrative penalties for non-compliance are presumably intended to emphasise. Consequently, in cases of that kind the discretionary considerations of deterrence and retribution require particular emphasis. They are likely to require particularly compelling circumstances before it would be proper to exercise a discretion to remit lodgment of penalties in favour of a taxpayer who was responsible for a substantial period of knowing and prolonged non-compliance with their lodgment obligations.

40. The Commissioner's submissions to the Tribunal emphasised that Mr Sharkey's prolonged lodgment delay could not be described as due to circumstances beyond his control. This is plainly correct. Mr Sharkey conceded his failure to supervise staff. The evidence demonstrated his failure to request appropriate assistance from his accountant, his computer accounting consultant or, in the later period, from Ms Blair - who seems to have been the most competent and reliable of his employees. Mr Sharkey's evidence also demonstrates his prolonged and knowing refusal to attend to the discharge of his lodgment obligations.

41. Mr Sharkey frankly conceded that his lodgment delay could not be attributed to circumstances beyond his control. Nevertheless he criticised the Commissioner's decision on the basis that the Commissioner had failed to consider the real reasons for his non-compliance. Partly this was because of the deficient performance of his staff. Partly it was because the difficulties of compliance, already significant because of the incompetence of his employee in the first six months of the GST regime, became compounded over time. Because of the accumulated difficulties, the

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pressures of his professional practice, and his own temperamental inclinations (which he characterised as psychological difficulties and by which he meant his tendency to avoid problems by not dealing with them directly), Mr Sharkey contended that he was simply unable to do what was required.

42. Mr Sharkey contended that particular regard should be had to the nature of his professional practice and the commitment it evidenced to his service in the community interest. This is a relevant consideration. His areas of professional legal practice were particularly demanding, and important. That he devoted himself to work of this kind and did much of his work on a legally aided basis, as well as doing voluntary legal work, properly entitles him to much credit. But the nature of his profession also requires him to pay proper regard to his own legal obligations. Whilst legal practitioners are not required to be "paragons" of rectitude: see
Ziems v The Prothonotary of the Supreme Court of New South Wales (1957) 97 CLR 279 per Kitto J; prolonged non-compliance with personal taxation obligations may itself bring about professional disgrace despite industry and propriety in a practitioner's discharge of their purely professional obligations: see
New South Wales Bar Association v Cummins (2001) 52 NSWLR 279. This is not to say that special standards apply to legal practitioners in relation to the exercise of the remission discretion. It is to say that prolonged and apparently deliberate (in the sense of knowing) non-compliance is not relevantly obviated by the ability of a legal practitioner taxpayer to demonstrate that their professional work has made a significant contribution to the community interest.

43. In support of his review application Mr Sharkey relied on the Tribunal's decision in
Re Kizquart Pty Ltd and Commissioner of Taxation 2005 ATC 2198; [2005] AATA 582. The taxpayer in that case was the service company set up by a solicitor who operated as a sole practitioner. It had delayed lodging GST returns during 2002, 2003 and 2004. The solicitor who controlled the taxpayer company explained that the delays were attributable to a number of considerations including: a misunderstanding as to whether or not payment had to be made with lodgment of the GST returns, a misunderstanding that the returns were required monthly instead of quarterly, financial pressures, overwork and family difficulties including the suicide of one child and the serious mental illness of another. In the result, despite the legal practitioner's acknowledgement that he knew he should have lodged the returns more promptly, the Tribunal remitted all but one of the penalties that had been imposed. Mr Sharkey submitted that this decision supported his own claim.

44. An appropriate degree of consistency in the exercise of the remission discretion is inherently desirable - provided it can be achieved at the same time as dealing with each matter properly and taking fully into account all of the circumstances relevant to the particular case. But the circumstances in
Re Kizquart Pty Ltd and Commissioner of Taxation 2005 ATC 2198; [2005] AATA 582 appear to be significantly different from the present case and cannot control the exercise of the Tribunal's review powers. The lodgment delay in Re Kizquart appears to have been recurrent, rather than prolonged. The taxpayer lodged returns late - rather than not at all - and the periods of delay involved seem (when regard is had to the penalty rate and the total penalty amount) to have been only a few months in each instance.

45. The real basis of Mr Sharkey's review application is his contention that he was "unable" to attend to his GST obligations - because of the combined effect of his professional work commitments, the related burdens involved in the proper administration of his practice and personal affairs and the "psychological difficulties" he had in dealing with them effectively. In my opinion this contention, in so far as it relies on an assertion that Mr Sharkey's "psychological difficulties" deprived him of the capacity to deal with his lodgment obligations involves little more than an attempt to characterise as a medical condition a reluctance to confront what was, or at least ultimately became, a time consuming and difficult task. That reluctance may even be regarded as understandable do a degree. But to characterise it as amounting to a relevant incapacity involves an unacceptably selective interpretation of Mr Sharkey's behaviour. It is selective because it supposes that Mr Sharkey's inherent "capacity" differed according to

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whether the task confronting him involved his professional work or his personal and administrative responsibilities. Whilst Mr Sharkey's administrative abilities may not have been the equal of his professional skill, there is no real reason to think that the industry, ability and judgement that are likely to have been displayed in the competent performance of his professional work could not have been brought effectively to bear on his administrative problems - if he had properly applied himself to that end. Indeed, his own performance, in lodging most of the 2000 to 2003 business activity statements in late December 2004 and early 2005, rather tends to demonstrate that point.

46. Mr Sharkey's emphasis on his "psychological difficulties" as probative of an inability to attend to his lodgment obligations also tends to obscure the reality of the choices he made in the way in which he neglected his obligations during the relevant period. Mr Sharkey claims he was overworked professionally - yet he continued to devote alternate weekends to his farming activities. If the combined effect of his professional and farming businesses meant that he could not properly attend to their proper administration, he ought to have taken effective action to alleviate the problems. Constant avoidance and tolerance of prolonged default was not an appropriate response. Mr Sharkey claims to have had inadequate employees, at least for a substantial part of the period of his non-compliance, yet he continued their employment without exercising proper supervision and without taking any effective steps to enlist the aid of either his accountant or his computer accounting consultant. Even on his own version of events, he eventually obtained the services of an employee who was apparently competent (Ms Blair) - yet he did not enlist her aid in attending to "regularising" his GST reporting obligations. He claimed credit for the fact that he set aside time at the end of 2004 and made a determined effort to bring his business activity statement reporting obligations up to date - yet he had not previously done so at the end of any of the calendar years in December 2000, 2001, 2002 or 2003.

47. Mr Sharkey claimed not to have deliberately failed to comply with his lodgment obligations - yet he knew he was not complying and refused to open correspondence that he knew was from the Australian Taxation Office. This was because he was unwilling to address the problems he knew that correspondence involved. Even if it is more correct to say that Mr Sharkey's non-compliance was "deliberate" only in the sense that he believed he could not provide accurate or proper returns, because of the accounting irregularities for which he thought his staff were responsible, that apparent difficulty first arose in the latter part of 2000 and he was aware of the problem at that time. Notwithstanding that knowledge, it was another four years before he took effective action to lodge the required business activity statements - and in the intervening period he lodged none at all.

48. It cannot be said, and Mr Starkey does not suggest, that the circumstances of his prolonged period of non-compliance was due to circumstances beyond his control. Neither can it be said, and again Mr Sharkey does not suggest, that he was at any time unaware of either his obligations or the fact of his non-compliance. Nor can it be said that he acted promptly to remedy the non-compliance when it was first drawn to his attention by the Commissioner (in the Commissioner's 15 April 2004 letter). Mr Sharkey ignored that reminder - either because he deliberately did not open the letter or because he continued with his course of delay and lack of effective remedial action.

49. The penalties ultimately imposed (and not remitted) are the maximum amount for each lodgment delay. The total sum of $10,450 is significant. Mr Sharkey, having sold his practice, recovered his health, finally remedied his lodgment failures, consulted with Ms Cahill and participated in these proceedings, has already received salutary admonitions about the effect of non-compliance. Perhaps the risk of his future non-compliance is small. But the principled exercise of the discretion to remit is not confined to consideration of the likelihood of future default. The administrative penalty is imposed as a sanction for past default and requires proper regard to the circumstances of the default itself. In the present case, Mr Sharkey's default was knowing, very prolonged and is conceded by him as not being attributable to circumstances beyond his control. Those

ATC 2232

circumstances suggest that Mr Sharkey yielded priority to other pressures and difficulties. In so doing, he could hardly have failed to appreciate that non-compliance exposed him to the risk of sanction, and at least the objective circumstances suggest that he knowingly exposed himself to the risk of whatever sanctions might be imposed as a result of his prolonged non-compliance.

50. In my opinion the statutory discretion to remit conferred by section 298-20 of the Taxation Administration Act 1953 is properly exerciseable in this case by paying primary regard to the extent and prolonged duration of Mr Sharkey's lodgment delay. That delay occurred despite Mr Sharkey's conceded awareness of his obligations and of the prolonged default. It also occurred in circumstances where he had available to him employed staff, a computer accounting consultant and his own personal accountant - all of whom he failed to specifically instruct to take action to remedy his sustained noncompliance. In these circumstances, of which the fact of prolonged and knowing non-compliance is the more significant, the principled exercise of the remission discretion justifies refusal of Mr Sharkey's remission request. In my opinion refusal of his remission request is the preferable decision in the circumstances. I am certainly not satisfied that Mr Sharkey has discharged his burden of proving that the Commissioner's 2 May 2006 decision should not have been made or should have been made differently.

51. The decision under review is affirmed.


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