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HUTSON v FC of T

Members:
A Sweidan SM

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2009] AATA 574

Decision date: 31 July 2009

ATC 2998

A Sweidan (Senior Member)

Background

1. The decisions which are the subject of this application for review by the Tribunal are the decisions of the Commissioner made on 18 January 2005. By those decisions, the Commissioner disallowed in full the applicant's objection to:

  • (a) the Notices of Assessment of GST net amount for each of the tax periods (quarters) ended 30 June 2001 to 30 June 2003 which were issued on 18 July 2005; and
  • (b) the assessment of penalty made by the Commissioner on 19 July 2005 for the tax periods (quarters) ended 30 June 2001 to 30 June 2003.

2. In these Reasons:

  • (a) "GST Act" means the A New Tax System (Goods and Services Tax) Act 1999, as amended;
  • (b) "ABN Act" means the A New Tax System (Australian Business Number) Act 1999, as amended;
  • (c) "TAA" means the Taxation Administration Act 1953;
  • (d) "applicant" means Michael Hutson.

Facts

3. The following facts were either agreed at the hearing before the Tribunal or are found by the Tribunal to be correct based on the documents before the Tribunal.

Practice structure

4. The applicant and Patrick John Duddy ( Patrick Duddy ) were accountants and the applicant was a registered tax agent at all relevant times.

5. In or shortly prior to the first half of 2000, the applicant and Patrick Duddy decided that they would combine their practices, that the combined accounting practice would be conducted by a company and that a service trust would be established to provide services to the company.

Hutson Duddy Pty Ltd (HD)

At all relevant times:

6. HD was the corporate vehicle used by the applicant and Patrick Duddy to provide accounting and taxation services to clients.

7. The applicant was a director and the public officer of HD.

8. Patrick Duddy was an employee of HD.

9. The main business activity conducted by HD was the provision of accounting services.

10. HD conducted a bank account with the National Australia Bank.

11. HD was registered for GST.

The Dugan St Admin Services Trust (Trust)

12. The applicant, Patrick Duddy and Maureen Duddy were the Trustees of the Trust.

13. The main business activity of the Trust was the provision of management and administrative services to HD.

14. The Trust conducted a separate bank account with the National Australia Bank and maintained a separate set of accounting records.

15. The Trust was registered on the Australian Business Register.

16. The Trust was registered with the Commissioner for GST purposes from 1 July 2000 until 1 July 2004.

17. The Trust was registered with the Commissioner as a PAYG tax Withholder from 1 July 2000 until 1 July 2004.

Business activity statements

18. The Trust lodged business activity statements with the Commissioner from 1 July 2000 to 30 June 2003 on a quarterly cycle and accounted for GST on a cash basis.

19. During the quarterly tax periods from 1 April 2001 to 30 June 2003 HD predominantly acquired its creditable acquisitions from the Trust, as is apparent from the following table which shows the creditable acquisitions disclosed in HD's activity statements and the taxable supplies disclosed in the Trust's activity statements during that period:

Hudson Duddy P/L Dugan St Admin Trust
Quarterly tax periods Creditable acquisitions (label G11) Taxable supplies (label G1)
01/4 - 30/06/01 50,645 50,645
01/07 - 30/09/01 71,158 71,158
01/10 - 31/12/01 47,881 47,881
01/01 - 31/03/02 52,760 52,760

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01/04 - 30/06/02		 83,406 83,268
01/07 - 30/09/02 96,702 96,509
01/10 - 31/12/02 73,690 64,811
01/01 - 31/03/03 64,537 64,537
01/04 - 30/06/03 62,978 62,978
  603,757 594,547

Management services

20. The Trust provided management and administrative services to HD, and, among other things, paid the expenses associated with those management and administrative services provided by the Trust to HD for the operation of HD's business.

21. Funds were transferred from HD's bank account to the Trust's bank account as payment for the management and administrative expenses incurred by HD with the Trust, including wages and rent.

Employment related documents

22. Documents and other evidence before the Tribunal clearly show that the Trust employed a number of persons who provided services to the accounting practice, see for example the Tax file number declaration forms provided to the Commissioner for five employees for the years ending 30 June 2000, 2001 and 2002.

Payment

23. The Trust made certain payments for GST to the Commissioner in accordance with it's BAS statements from time to time.

Accounting practice ceases to operate

24. The accounting practice ceased to operate on or about 30 June 2003.

Liquidation of HD

25. HD was placed into liquidation on 30 January 2004.

26. A Report as to the Affairs of HD was compiled for the purposes of the liquidation and the applicant verified that the statements in the Report were correct on 4 February 2004.

27. The amount claimed by the Commissioner from HD recorded in the list of HD's unsecured creditors was $17,229.51.

28. The Trust was not included in the list of HD's sundry debtors.

Adjustments to Trust activity statements and relevant communications

29. On 28 April 2004, the applicant asserted to an officer of the Commissioner (Karen Drummond) by telephone that the outstanding debt due to the Commissioner by the Trust for GST as shown in the Trust's BAS statements was properly the debt of HD rather than the Trust and should not be payable by the Trust.

30. On 29 April 2004, in a telephone conversation between Nancy Shiels (for the Commissioner) and the applicant:

  • (a) the applicant stated that he wanted to adjust HD's debt to the Commissioner by including the Trust's outstanding debt so that the Commissioner would no longer need to pursue the Trust's debt;
  • (b) Nancy Shiels (for the Commissioner) informed the applicant that:
    • (i) the Trust was a separate legal entity to HD;
    • (ii) HD's activity statements could not be amended to include the Trust debts;
    • (iii) the three Trustees were equally and severally liable for the total debt of the Trust.

31. Also on 29 April 2004, in a series of four telephone conversations between Karen Drummond (for the Commissioner) and Patrick Duddy:

  • (a) Karen Drummond (for the Commissioner) stated that the Trust's outstanding debt must be paid in full or an arrangement entered into by 14 May 2004 or bankruptcy notices would be issued to the Trustees;
  • (b) Patrick Duddy stated that the activity statements lodged from December 2002 onwards would be amended which would reduce the GST component to nil but the Trust may still have to report Pay As You Go/Withholding (PAYGW).

32. By letter dated 6 May 2004 under the name of Pat Duddy & Associates, Accountants, Patrick Duddy requested the Commissioner to adjust to nil all of the labels (i.e. GST and PAYGW) on all of the activity statements

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lodged by the Trust for the quarterly tax periods from 1 July 2000 to 30 June 2003.

33. In a further telephone conversation between Karen Drummond and the applicant on 11 May 2004:

  • (a) the applicant stated that:
    • (i) the Trust had amended the GST component of its activity statements;
    • (ii) as the Trust was paying GST funds which were loaned and totalled less than $50,000 the Trust did not have to report GST;
    • (iii) he did not know what tax periods the amendments concerned but thought that the relevant tax periods were the two previous years;
  • (b) Karen Drummond (for the Commissioner) stated, that:
    • (i) the amendments had not been recorded on the computer system;
    • (ii) as the Trustees had opted to register for GST, the Trustees were obliged to charge and report GST.

34. The applicant did not challenge or dispute the evidence of Karen Drummond and Nancy Shiels as to the telephone conversations referred to above.

35. On 21 May 2004 and arising from the request made in the letter of 6 May 2004 from Patrick Duddy the labels in the Trust's activity statements for 1 April 2001 to 30 June 2003 for GST and PAYG were reduced to nil on the Commissioner's computer system resulting in adjustments in favour of the Trust of $131,417 being $36,761 for GST and $94,656 for PAYGW.

No consequential adjustments to HD's activity statements

36. Consequential adjustments were not made to HD's activity statements for the period from 1 July 2000 to 30 June 2003 in that HD's activity statements were not amended to:

  • (a) exclude acquisitions of management and administrative services from the Trust from HD's creditable acquisitions;
  • (b) account for the payment of salary and wages to the employees and for the remission of PAYGW to the Commissioner that had been previously disclosed on the Trust's activity statements.

Cancellation of Trust ABN and GST registration

37. The Trust's ABN and GST registrations were both cancelled on 1 July 2004.

HD wound up

38. HD was wound up and a final meeting of creditors was held on 6 January 2005.

Audit

39. The Commissioner conducted an audit which was concluded in July 2005.

40. As a result of the audit, the Commissioner revised the activity statements of the Trust for the quarterly periods from 1 April 2001 to 30 June 2003 by reinstating the original label amounts as set out in the following table [T1 at 32 and T61] .

(1)
Quarterly tax period 		(2)
Label 1A 		(3)
Label 1B 		(4)
Adjusted net amount 		(5)
Label W2 		(6)
Net Amounts
(Label 9)
1 April to 30 June 2001 4,604 1,384 3,220 6,477 9,697
1 July to 30 September 2001 6,469 2,490 3,979 7,275 11,254
1 October to 31 December 2001 4,353 1,119 3,234 7,205 10,439
1 January to 31 March 2002 4,796 1,052 3,744 7,087 10,831
1 April to 30 June 2002 7,570 2,141 5,429 8,360 13,789
1 July to 30 September 2002 8,774 2,442 6,332 9,417 15,749
1 October to 31 December 2002 5,892 1,392 4,500 8,907 13,407
1 January to 31 March 2003 5,867 2,466 3,401 8,999 12,400
1 April to 30 June 2003 5,725 1,322 4,403 8,732 13,135
Totals 54,050 15,808 38,242 72,459 110,701

41.

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As a result of the audit, the Commissioner also:
  • (a) reversed the PAYG component of the earlier adjustment on the Commissioner's computer system resulting in adjustments in favour of the Commissioner of $94,656; and
  • (b) reversed the GST component of the earlier adjustment for quarterly periods from 1 April 2001 to 30 June 2003 on the Commissioner's computer system resulting in adjustments in favour of the Commissioner of $38,242.

42. By letter dated 19 July 2005, the Commissioner informed the Trust of the outcome of the audit and of the manner in which the activity statements of the Trust were or would be revised and further that there was a shortfall of $110,701.00 (being $38,242 for GST and $72,459 for PAYGW) and that the administrative penalty for the shortfall was $55,350.50 (being 50% of the shortfall).

Assessment of GST net amounts

43. On or about 18 July 2005, the Commissioner issued a Notice of Assessment of GST net amount for the quarters ended 30 June 2001 to 30 June 2003 inclusive.

Assessment of administrative penalty

44. The Commissioner made a determination that the Trustees had made statements that were false or misleading under section 284-75 of Schedule 1 to the TAA in relation to the adjustments to the GST amounts and the PAYGW amounts in the activity statements for the tax periods from 1 July 2000 to 30 June 2003. As such, there were shortfall amounts totalling $110,701 being the net amount as set out in the table above.

45. The Commissioner also made a determination that the shortfall was caused by the recklessness of the Trust as to the operation of a taxation law, with the result that the base penalty amount imposed was $55,350.50 being 50% of the shortfall.

Assessment of Administrative Penalty

46. On or about 19 July 2005, the Commissioner issued a Notice of Assessment of Administrative Penalty for the tax periods from 1 July 2000 to 30 June 2003.

Objection

47. Munro Doig, solicitors, sent a letter to the Commissioner dated 21 September 2005 stating that they:

  • (a) acted for the Trustees of the Trust;
  • (b) were instructed to object to the reinstatement of the GST component in the Trust activity statements and the imposition of the administrative penalty;
  • (c) would lodge a formal notice of objection shortly.

48. However the Commissioner did not receive a formal notice of objection from any solicitors acting on behalf of the Trust, but the applicant himself on behalf of the Trust subsequently objected to the reinstatement of the GST component in the Trust activity statements and the imposition of the administrative penalty by letter dated 14 June 2006.

Issues for the Tribunal

49. The above facts give rise to the following issues:

  • (a) Did the Trust make taxable supplies to HD for consideration in the course or furtherance of an enterprise pursuant to the relevant provisions of the GST Act for the tax periods from 1 April 2001 until 30 June 2003?
  • (b) Did the Trust have a shortfall amount of $110,701 for the tax periods from 1 April 2001 until 30 June 2003 as a result of a statement that was false or misleading in a material particular?
  • (c) Did the shortfall amount or part of it result from recklessness by the Trust (or its agent) as to the operation of a taxation law?

Applicant's contentions and Tribunal's findings on the relevant facts and application of the law

50. The Tribunal finds that the applicant was one of three co-trustees of The Dugan Street Admin Services Trust, as was admitted by him in his evidence notwithstanding his earlier denial of this.

51. The Tribunal notes that under the general law a trust is not a legal person. A trust is a device by which one person (the trustee) holds property for the benefit of another (the

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beneficiary) in circumstances where there is imposition of a personal equitable obligation on the trustee to deal with the property for the benefit of the beneficiary. Rights, duties and powers arise as a consequence of the trust relationship vis-à-vis both (1) the trustee and the beneficiary inter se; and (2) the trustee, the beneficiary and the property the subject of the trust.

52. A trustee contracts as principal. Under the general law a trustee has personal liability for debts and other liabilities incurred as trustee with third parties: see H Ford & W Lee Principles of the Law of Trusts at [14.010].

53. While under the general law a trust is not a legal person capable of suing and being sued, for GST purposes a trust is described as an "entity": s 184-1(1) of the GST Act. The GST legislation clearly seeks to treat a trust as having a separate legal identity in the same way as a legal person does.

54. But even though a trust is defined as an entity for the purpose of s 184-1(1), the legislation recognises that it is the trustee who carries on the affairs of a trust. Thus s 184-1(2) of the GST Act goes on to provide that:

"The trustee of a trust … is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time ." (Emphasis added)

55. See also the example to s 184-1(3) of the GST Act. This suggests that in a trust with multiple trustees: (1) the trustees collectively comprise the entity; and (2) each individual trustee is a "member" of the entity.

56. Most of the relevant provisions of the GST Act are written in the second person and are directed to "you". See e.g. ss 9-5, 11-20 & 33-3. However, 7-15 of the GST Act is somewhat different in defining the net amount by reference to amounts to be paid by or refunded to an entity.

57. By the dictionary provisions of s 195-1 of the GST Act the expression "you" applies to entities generally unless its application is expressly limited. Thus, reading s 184-1(1)&(2) and s 195-1 together with the other relevant provisions under the GST Act, where there is a net amount payable in respect of a trust it is payable by the trust as a notional entity consisting of the persons who are the trustees at any given time.

58. It is clear that the "you" referred to, and on whom liabilities and obligations are imposed, is the trustee of the trust:
Confidential v Commissioner of Taxation 2008 ATC 1-002; [2008] AATA 415 at [6]-[7] referring to Hill J in
HP Mercantile Pty Ltd v Federal Commissioner of Taxation 2005 ATC 4571; (2005) 143 FCR 553 at [2]. Moreover, where there are multiple trustees, by s 184-1(2) of the GST Act, the "you" is all of the persons who are the trustees at the given time, i.e. all the members of the entity.

59. The reviewed assessments were thus properly directed to the Trust, being made under the now repealed s 22 TAA (which referred to "your" net amount for a tax period), but resulted in a liability for each of the 3 trustees. See now s 105(1) of Schedule 1 to the TAA. Further, as they created a tax-related liability which persons were jointly liable to pay, the 3 trustees were each liable for the whole of the amount: s 265-45(1) of Schedule 1 to the TAA.

60. The relevant administrative penalty provision also use the term "you". See ss 284-75(1) of Schedule 1 to the TAA. In some circumstances the administrative penalty division, Division 284 of Schedule 1 to the TAA, applies to trusts as if any shortfall amount as a result of a false or misleading statement were the trustee's shortfall amount: s 284-30 of Schedule 1 to the TAA. See also
Confidential v Commissioner of Taxation 2008 ATC 1-002; [2008] AATA 415 at [21]. Section 284-30 has no application to the present case in that no beneficiary of the trust has any shortfall amount. Again that terminology applies to entities generally. See s 3AA(2) of the TAA and ss 995-1(1) & 4-5 of the ITAA1997. See also s 960-100 of the ITAA 1997 - the entities generally include a "trust" (with like provisions as to the relevant entity consisting of the trustees). In short, penalties are imposed on entities: see s 298-5 of Schedule 1 to the TAA.

61. Clearly where there are multiple trustees there is no basis to impose an administrative penalty on only one of them. The "you" refers to the entity, i.e. all of the persons who are the trustees at the given time. Refer to the statutory

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provisions set out above. Accordingly, where a trust entity, by a trustee member acting for the trust entity, does something that means that the trust entity incurs an administrative penalty, the penalty applies to the trust entity, i.e. all of the persons who are the trustees at the given time.

62. The applicant contends that Mr Duddy, as one of three trustees, could not amend the Trust's BASs unilaterally on behalf of the Trust: applicant's SFIC paras 85-86. Reliance is placed on cl. 18.2 of the Trust Deed (T-79 page 268).

63. In the Tribunal's opinion that contention is misconceived because:

  • (1) First, the issue is not one of authority under the Trust Deed, but rather the proper construction of the relevant statutory provisions - where a statement of the requisite character is made by or on behalf of an entity it has the consequences provided for under the taxation legislation.
  • (2) Second, the act was not the exercise of a power, discretion or authority conferred on the trustees "by this Deed".
  • (3) Third, cl. 18.2 of the Trust Deed is not exhaustive.
  • (4) Fourth, in any event the evidence clearly shows that Mr Duddy did not act unilaterally. See further below.

Issue 1: did the Trust make taxable supplies to HD within s 9-5 of the GST Act?

64. The Trust was registered within the meaning of the GST Act: applicant's SFIC para 9 & 48; ST-2 page 630. Any relevant supplies were plainly connected with Australia. Accordingly, the Tribunal need only consider the following sub-issues.

(1) Was the "Trust" a trust, i.e. was there a relevant entity?

65. The applicant initially contended that there was no Trust and that he was not a trustee of the Trust.

66. There are numerous admissions including applicant's own evidence that gainsay that contention. The Tribunal finds that the Trust was a trust entity and the applicant was a trustee. For example:

  • (1) The Trust, by the applicant as declarant (referred to as a trustee), registered for an ABN and GST: ST-2 pages 628-634.
  • (2) The Trust, by the applicant as trustee, lodged income tax returns for the 2000, 2001 and 2003 financial years: ST-3 pages 635-638; ST-4 pages 639-642; appendix 4 to applicant's SFIC.
  • (3) The Trust completed employment declaration forms, TFN declaration forms for employees as payees and PAYG summaries for its employees.
  • (4) The Trust maintained a bank account in the name of "Dugan Street Admin Service Trust" in respect of which the applicant was a signatory and the Trust maintained its own financial records.
  • (5) Lawyers acting on the instructions of the applicant informed the Commissioner that they "acted for the trustees of the Dugan Street Trust": T-62 page 202. See also T-64 at page 206.
  • (6) In correspondence the applicant referred to the Trust and himself as a trustee of the Trust: T-66 pages 209 & 210; T-67 pages 211, 212, 213, 214, 215, 216 & 217; applicant's letter to the Tribunal dated 24 June 2008, esp. at page 2 (having so described himself to the Tribunal it is unacceptable that the applicant seeks in his affidavit to say that he did not act as a trustee of the Trust.)
  • (7) The applicant's affidavit concedes the existence of the Trust: applicant's affidavit para 11, 14, 20 & 21. See also the applicant's SFIC at para 6, 8-9, 15-19, 22, 25-26, 51-55.

67. The applicant seeks to make something of the fact that he appears not to have signed the Trust Deed: T-79 page 274. (The Trust Deed is itself evidence of the existence of the Trust.)

68. This is not a kind of trust that required a written declaration by a putative trustee. In any case the documentary evidence specified above suffices to manifest and prove the Trust and the applicant's role as trustee. The 3 certainties for a trust are established.

69. Indeed, the applicant accepts that he and the Duddys intended to adopt a classic "Phillips" type service trust arrangement: applicant's affidavit para 5. That is in substance what occurred save that it appears that there

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was no mark-up on the administrative services and goods provided by the Trust to HD.

(2) Did the Trust make "supplies" for "consideration"?

70. The concept of "supply" includes a supply of goods or services: s 9-10(2) GST Act.

71. On the evidence the Trust supplied administrative services and goods to HD. These included employment services, office accommodation services (including the provision of office and other equipment) and goods.

72. "Consideration" includes any payment in connection with a supply: s 9-15(1) GST Act.

73. The applicant admits that HD reimbursed the Trust for the supplies: applicant's affidavit para 11(d); applicant's SFIC paras 15, 25, 86.6 &100; T-67 pages 213 & 215.

74. Reimbursement by HD to the Trust is confirmed in:

  • (1) HD's BASs: ST-9 to ST-20 pages 652 to 675;
  • (2) HD's and the Trust's bank statements: T-83 & T-85 pages 288-345 & 356-419;
  • (3) the Trust's GST calculation worksheets: T-88 at pages 436, 455, 461, 466, 471, 507, 514, 521 & 528.

75. Reimbursement, i.e. payment, for the supplies made by the Trust to HD constitutes consideration within the meaning of s 9-15(1) of the GST Act. There need not be a profit, contrary to the argument pressed in the applicant's objection: T-67 page 214 & 215.

(3) Were the supplies in the course or furtherance of an "enterprise" carried on by the Trust?

76. The concept of an "enterprise" is defined in s 9-20 of the GST Act. Relevantly it encompasses an activity or series of activities in the form of a business. As to "business" see the definition in s 195-1 of the GST Act.

77. The Commissioner relies on MT 2006/1 as to what is encompassed in the concept of enterprise. See in particular at [153]-[154], [164] & [170]-[179]. The Tribunal agrees with the views there expressed by the Commissioner.

78. The applicant contends that it is necessary to establish that the Trust had an intention to make a profit from its activities: applicant's SFIC para 97. However that is but one of a number of the relevant indicators in determining whether an activity, or series of activities, amounts to a business. (The s 9-20(2)(c) exclusion is not engaged where, as here, the relevant entity is a trust. The reference to "individual" is a reference to an individual as an entity.)

79. There are numerous admissions that the Trust was carrying on an enterprise. For example:

  • (1) The Trust, by the applicant as declarant, registered for an ABN and GST: ST-2 pages 628-634. By s 25-5 of the GST Act it is not possible to seek registration for GST unless carrying on an enterprise.
  • (2) During the relevant period the Trust never sought to cancel its registration for GST, as would have been required under s 25-50 of the GST Act had the Trust ceased to carry on an enterprise. Given the applicant's and Mr Duddy's training and professional qualifications as accountants and taxation practitioners significant weight must be given to this and the previous factor.
  • (3) The Trust's solicitor's letter dated 21 September 2005 accepted that the Trust was required to be registered for GST and "was carrying on an enterprise": T-62 page 202. (That the acceptance was for the purpose of the letter only carries no legal effect in the Tribunal's opinion.)

80. The applicant referred to:

  • (a) the Trust's "trading": T-66 page 209;
  • (b) the Trust's "operations" & "duties": T-67 pages 213 & 216;
  • (c) the Trust as an "enterprise" (albeit not a profitable one): T-67 page 215;
  • (d) the Trust being "entitled to claim a refund of input tax credits on acquisitions made": T-67 page 215. Self-evidently that was not possible unless the Trust was registered for GST and carrying on an enterprise.

81. The Tribunal also refers to the evidence of the Trust in fact conducting an activity in the form of a business as referred to above.

82. Among other things the applicant, on behalf of the Trust, provided income tax returns for the 2000, 2001 and 2003 financial years in

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which it is said that the Trust's main business activity is "administrative services": ST-3 pages 635-638; ST-4 pages 639-642; appendix 4 to applicant's SFIC.

83. The income tax returns show:

  • (1) in 2000: business income and expenses of $90,079: ST-3 page 635;
  • (2) in 2001: business income and expenses of $265,226: ST-4 page 639;
  • (3) in 2003: business expenses of $245,937: applicant's SFIC appendix 4 page 2.

84. Similarly, the Trust's financial records show large seemingly business related expenses in each of the 2002 and 2003 financial years. For example, in 2002 gross receipts of $231,879.46: T-88 page 475; together with expenses such as advertising and promotion - $6,129.76, cleaning - $1,634.55, computer maintenance - $4,737.59, computer software - $1,899.09, insurance (workers compensation) - $945.50 and lease payments - $2,437.90.

85. The evidence clearly shows that the Trust was conducting an activity, namely, the provision of administrative services to HD, in the form of a business.

86. There was a significant commercial activity; it was of a reasonable size and scale. The Trust's purpose and intention was to engage in a commercial activity: applicant's affidavit paras 5 & 11. The Tribunal notes that the activity was recurrent and regular; it was ongoing. The activity was similar to that of what are probably thousands of Phillips style service trust arrangements to professional services firms and companies. The activity was systematic, organised and carried on in a businesslike manner with the keeping of separate records on behalf of the Trust.

87. Underlying the applicant's contentions appears to be that the Trust was a nothing - a mere "reimbursement vehicle" for HD: applicant's SFIC para 100 (see also paras 96-106). The applicant, by his objection, also contended that the "setup … was done to suit an operation which never came into fruition": T-67 page 213. In correspondence he referred to the trading being undertaken by HD and not the Trust: T-66 page 209.

88. In the Tribunal's view it is no answer to say that what was hoped for in terms of the business operation never came to pass. Nor is it an answer to claim that HD may have operated without any arrangement with the Trust - which is what the applicant's case comes down to. It is always the case that things might have been done differently. What is relevant, however, is what entities were in existence, and what those entities actually did, rather than what might have been.

(4) Conclusion

89. The Tribunal finds that it is clear on the evidence that the Trust made taxable supplies to HD within s 9-5 of the GST Act and that this is in fact exposed by the orders claimed in the applicant's SFIC. The applicant admits a tax-related liability of $29,222.93, but (as 1 of 3 trustees) seeks an order declaring that he is only responsible to pay one-third. This begs the question: why, as trustee, would the applicant have any such tax-related liability? It is only if the Trust, of which the applicant was a trustee, made taxable supplies to HD within s 9-5 of the GST Act.

Issue 2: is the Trust liable for an administrative penalty on a shortfall amount of $110,701 to be assessed on the basis of recklessness?

90. The administrative penalty was imposed under s 285-75(1) of Schedule 1 to the TAA in an amount determined in accordance with s 284-85(1) where the base penalty, under item 2 to s 284-90(1), was 50% of the shortfall amount - the shortfall amount resulting from recklessness as to the operation of a taxation law.

(1) Were there "Statements" that were "False or Misleading" in a "Material Particular"?

91. The entry of the nil balances on the Trust's amended BASs as lodged on 6 May 2004 was a statement to the Commissioner - relevantly numerous statements that the Trust had no GST on sales (no taxable supplies) and no PAYGW amounts to report for the relevant periods.

92. The statements were made by the Trust.

93. Alternatively, the statements were made by Mr Duddy as the Trust's agent (as to which see also s 284-25 of Schedule 1 to the TAA.) Mr Duddy then acted as tax agent for the Trust: T-60 page 161; T-71 page 224. In any case Mr

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Duddy was the Trust's agent for the purposes of the general law. Based on the telephone conversations of 29 April 2004 and 11 May 2004 referred to above the Tribunal finds that lodgement of the revised BASs was with the applicant's knowledge and authority: see also T-92 pages 602, 605 & 607; Affidavit of Drummond para 13(g) & 15-16; Affidavit of Shiels para 10. Further, the applicant ratified the statements: see T-66 page 209 & 210; T-67 page 216.

94. The statements were clearly false; they were contrary to fact and wrong. In this context the word "false" means "wrong":
Pearson v Deputy Commissioner of Taxation [2009] FCA 558 at [23].

95. As to the GST on sales and GST nil net amounts, falsity is established by the Tribunal's rejection of the applicant's case in Issue 1.

96. As to the PAYGW nil net amounts, there was never any objection seeking to uphold these statements: falsity is accepted.

97. The falsity was in a material particular as it was likely to, and clearly did, affect the Commissioner's decision regarding the calculation of the Trust's tax-related liabilities and entitlement to a refund. For the relevant periods it resulted in: (1) adjustments, by way of reduction, to the Trust's GST net amounts ($38,242) and PAYGW amounts ($72,459); and (2) consequential entitlement to a refund of $110,701 - which was reflected in a credit to the Trust's integrated client account: see appendix 2 to the applicant's SFIC.

(2) Was there a "Shortfall Amount" as a result of the statements?

98. By item 1 to s 284-80(1) of the TAA there is a shortfall amount where a tax-related liability of the Trust for an accounting period, worked out on the basis of the statements, is less than it would be if the statements were not false. The amount of the shortfall amount is the amount by which the relevant liability is less than it would otherwise have been: s 284-80(1) of Schedule 1 to the TAA.

99. The concept of a "tax-related liability" includes:

  • (1) GST net amounts: item 5 to s 250-10(2) of Schedule 1 to the TAA;
  • (2) PAYGW amounts: item 105 to s 250-10(2) of Schedule 1 to the TAA.

100. The Trust's relevant tax-related liabilities for the period 1 April 2001 to 30 June 2003, worked out on the basis of the statements in the amended BASs lodged on 6 May 2004, were nil.

101. If the statements were not false, i.e. if they were correct, and the Trust's tax-related liabilities were worked out on that basis, the GST net amounts and PAYGW amounts would have been as originally reported by the Trust. The reinstated GST net amounts and PAYGW amounts totalled $110,107 as set out above

102. The Tribunal finds accordingly that the shortfall amount as a result of the statements is $110,701.

(3) Was "Reasonable Care" taken in making the statements, i.e. does the exception under s 284-215(2) of Schedule 1 to the TAA apply?

103. The onus of establishing the exception under s 284-215(2) rests on the applicant. That is consistent with the applicant's burden under s 14ZZK(b)(i) of the TAA, i.e. to show that the assessment is excessive.

104. Reasonable care is determined objectively. As to the Trust, it is the care that a reasonable person, in the same circumstances as the Trust, would be likely to exercise in making the statement: MT 2008/1 at [27]-[29].

105. Regard must be had to the nature of the obligation requiring the exercise of reasonable care and the particular circumstances in which the taxpayer under that obligation finds itself, i.e. what would be done by a reasonable person in the circumstances of the Trust:
Confidential v Commissioner of Taxation 2008 ATC 1-002; [2008] AATA 415 at [57] & [60].

106. It thus involves consideration of the relative size of the shortfall, type of item, complexity of the law and underlying transactions and the difficulty or expense to avoid the risk of making an error. The Commissioner's position is that it is necessary to consider the personal attributes of the taxpayer and what care a reasonable person with those attributes would have taken in the taxpayer's particular circumstances: MT 2008/1 at [45]. The Tribunal notes that Deputy President Forgie took a contrary view in

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Confidential v Commissioner of Taxation 2008 ATC 1-002; [2008] AATA 415 at [60] & [62].

107. In the Tribunal's view it is clear that the standard of care required of a tax agent is higher than that expected of an ordinary person due to the knowledge, education, skill and experience of the practitioner.

108. In this case it is clear that the Trust (alternatively Mr Duddy as agent of the Trust) failed to take any care, let alone reasonable care, in making the false statements. The motivation was clearly to move the tax-related liability to HD, then in liquidation, so that the trustees would not be pursued personally in respect of the Trust's debt.

109. The false statements if accepted would self-evidently have eliminated all of the Trust's current and past tax-related liabilities and result in a refund of in the order of $131,417 (the total of the GST net amount and the PAYGW amounts) less the then outstanding amount (some $16,640). In the opinion of the Tribunal this was a serious and significant matter as concerns the Trust's compliance with its taxation obligations.

110. A reasonable person in the circumstances of the Trust would in the Tribunal's view :

  • (1) First, have considered whether the false statements, as concerns both the GST amounts and the PAYGW amounts, were soundly based and correct in light of the historical practices and conduct of HD and the Trust. A reasonable person would have reviewed all of the available material - at the least that which is identified above
  • That is all the more so given the telephone conversations that occurred between the applicant and Mr Duddy and ATO officers on 29 April 2004 (the Tribunal notes Mr Duddy's then recognition that the PAYGW may still need to be reported and intention to limit the nil GST amount to the period from December 2002 onwards).
  • (2) Second, have taken competent legal advice on the issue.
  • (3) Third, not acted to make the false statements until having:
    • (a) discussed the issue with the liquidator of HD;
    • (b) obtained the liquidator's assurance that the liquidator, on behalf of HD, accepted the "mirror consequences" of lodgement of the Trust's amended BASs for the relevant period (i.e. that HD should also lodge amended BASs for the relevant period which would have resulted in HD reducing its reported amounts for GST on purchases from the Trust and accepting an obligation in respect of the PAYGW amounts);
    • (c) arranged for contemporaneous lodgement of amended BASs for the relevant period on the part of HD with those that were in fact lodged by the Trust.
  • (4) Fourth, have engaged in further dialogue with the Australian Taxation Office on the issue (particularly in light of the 29 April 2004 telephone conversations) and, if necessary, sought a private binding ruling rather than acting unilaterally.

111. It is clear that the Trust (alternatively Mr Duddy as agent of the Trust) and the applicant did not take any such steps. They did not turn their minds to the issue appropriately or at all. That persons being experienced accountants and taxation practitioners did not do so gives rise to the irresistible inference that they were, as is contended for by the Commissioner, motivated to make the false statements so as to move the outstanding debt to HD, then in liquidation, so that the trustees would no longer be pursued in respect of the Trust's debt, i.e. it was to avoid personal liability. There was no genuine effort to ensure that the false statements were correct. The Trust (alternatively Mr Duddy as agent of the Trust) failed to take reasonable care in making the false statements.

(4) Did the shortfall amount result from "Recklessness"?

112. Recklessness requires more than mere inadvertence or carelessness, but does not require a finding of dishonesty or intentional disregard. It is accepted that:

"Recklessness means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be

ATC 3008

grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and the regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness."

See
BRK (Bris) Pty Ltd v FCT (2001) ATC 4111 at 4129 (per Cooper J) (approved in
Hart v Commissioner of Taxation 2003 ATC 4665; (2003) 131 FCR 203 at [43] (per Hill and Hely JJ) &
Commissioner of Taxation v R & D Holdings Pty Ltd 2007 ATC 4731; (2007) 160 FCR 248 at [70] (per Heerey and Edmonds JJ).

113. Recklessness will usually be found to have been established if a person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person:
Hart v Commissioner of Taxation 2003 ATC 4665; (2003) 131 FCR 203 at [43].

114. The circumstances referred to above show recklessness in this sense. That is particularly so given the applicant's and Mr Duddy's profession and qualifications as accountants and taxation practitioners. See also the cases referred to below. The Trust (alternatively Mr Duddy as agent of the Trust) were, at best, grossly careless or indifferent to whether or not the false statements were correct. For example, on what possible basis could the statements as to the PAYGW net amounts be defended?

Issue 3: should the administrative penalty be remitted in full or in part under s 298-20 of Schedule 1 to the TAA?

115. The applicant contends that the Commissioner should, as a matter of discretion, determine the amount of $16,663.91 or a different amount as the shortfall amount: applicant's SFIC para 92. Presumably this is on the basis that the Trust's unpaid tax-related liability before the 6 May 2004 amended BASs is said to be $16,663.91: see applicant's SFIC paras 90 (and also at paras 31-33 & 85.6).

116. Whether there is a shortfall amount is determined as a matter of law by applying s 284-80 of Schedule 1 to the TAA to the facts as found; there is no element of discretion.

117. It is, however, possible to invoke the Commissioner's general discretion under s 298-20 of Schedule 1 to the TAA to remit all or a part of the penalty. The applicant did not, by the application for review, seek review of the decision on the objection determination to uphold the decision not to remit the penalty. Nor does the applicant rely on s 298-20 in the applicant's SFIC. The respondent takes no issue in this respect and invites the Tribunal to consider the discretion under s 298-20 on its merits. As to this the Trust carries a burden of establishing that the Commissioner's refusal of the discretion to remit should not have been made or should have been made differently:
Sharkey v Commissioner of Taxation 2007 ATC 2218; [2007] AATA 1435 at [20] & [50]. See also s 14ZZK(b)(iii) of the TAA.

118. The applicant's primary argument for a favourable exercise of the discretion appears to be that the Commonwealth "was never deprived" of, and the Trust did not have any benefit from, the shortfall amount: applicant's SFIC paras 90.1-90.5 & 90.9-90.10 (see also paras 37-38 & 74.)

119. The Tribunal finds that this argument is misconceived. The mere fact that no harm has been done is not of itself a matter that can be taken into account on the exercise of the discretion to remit:
Dixon v Commissioner of Taxation 2008 ATC 20-015; (2008) 167 FCR 287 at [21]. See also at [24]-[25].

120. In Dixon the Full Court of the Federal Court held that it was not necessary to establish "special circumstances" before the discretion to remit could be established: at [21]. The real question is (at [26]):

"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."

121. It is appropriate to consider whether there are circumstances that could be regarded as mitigating the taxpayer's behaviour in some way:
Hobart Central Childcare Pty Ltd v Commissioner of Taxation 2005 ATC 2351; [2005] AATA 1027 at [205] (approved in
Cody v Commissioner of Taxation 2007 ATC 2208; [2007] AATA 1342 at [28].)

122.

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However the particular circumstances of the Trust are not the only consideration. The proper operation of the taxation system is intended to serve the public interest, something the statutory administrative penalties for non-compliance are intended to emphasise:
Sharkey v Commissioner of Taxation 2007 ATC 2218; [2007] AATA 1435 at [39].

123. At issue is a penalty. Accordingly, normal sentencing principles apply when considering the exercise of the discretion to remit. The threefold purposes of punishment must be kept in mind, i.e. retribution, deterrence and reformation:
William Vazquez & Associates Pty Ltd v Commissioner of Taxation 2005 ATC 2087; [2005] AATA 301 at [14] & [28] (approved in
Sharkey v Commissioner of Taxation 2007 ATC 2218; [2007] AATA 1435 at [37] and the Tribunal's decision in
Pinot Nominees Pty Ltd v Commissioner of Taxation 2009 ATC 10-096; [2009] AATA 466 at [25].)

124. The Tribunal is of the opinion that it will be a rare case in which the discretion to remit is exercised in the face of a penalty that arises in circumstances of recklessness. First, for there to be an administrative penalty the taxpayer must have failed to take reasonable care in making the statement. Second, there will be a finding that this was a result of recklessness as to the operation of a tax law. The Tribunal finds both factors to be present here.

125. The following relevant factors militate against the exercise of the discretion to remit:

  • (1) At the relevant time the applicant and Mr Duddy were accountants and taxation practitioners with training and professional qualifications. That is of critical importance. See e.g.:

    • (a) The Taxpayer v Commissioner of Taxation 2005 ATC 197; [2005] AATA 696 at [26]:

      "The director, as a member of the accounting profession and a registered tax agent, and in her capacity as the Applicant's directing mind as well as its agent, is in a position to have a better than average understanding of taxation laws. It is also expected of a tax agent that he or she have a high ethical standard in handling tax affairs and have a greater appreciation of the likely consequences of any disregard of taxation obligations."


    • (b) Noac Consultants Pty Ltd v Commissioner of Taxation 2006 ATC 2551; [2006] AATA 1035 at [10]:

      "As a tax agent it should be expected that NOAC would have a better than average understanding of the need to correctly record transactions in relation to taxation matters and be well aware of the consequence of making incorrect claims."

  • (2) As noted earlier the motivation behind the making of the false statements was clearly to move the outstanding debt to HD, then in liquidation, so that the trustees would no longer be pursued in respect of the Trust's debt, i.e. it was to avoid personal liability that had previously been accepted.
  • (3) The Tribunal finds that there are none of the usual mitigating factors, e.g. personal illness, absence, inadvertent error or reasonable reliance on a competent person who was responsible for the false statements.
  • (4) The false statements resulted in a shortfall amount that comprised of all of the Trust's previous tax-related liabilities; it was not a minor part of the Trust's tax-related liability.
  • (5) There is no apparent basis on which the false statements as to the nil PAYGW amounts could have been made - something clearly appreciated by the applicant in his telephone call with the ATO on 11 May 2004: T-92 page 607.

126. The usual public interest factors as noted above are also applicable.

127. For the applicant, the most that can be said is that it was a co-trustee who made the false statements. However, in the Tribunal's opinion it was clearly done with the applicant's knowledge and authority. In any case, if there is a decision to remit it operates for the benefit of the Trust entity, and all of the trustees, not just the applicant. If the applicant wishes to allege maladministration of the Trust on the part of Mr Duddy, causing the applicant loss as a

ATC 3010

co-trustee, then there are possible remedies under the general law that the applicant may pursue against him but that is not a matter for the Tribunal.

128. The Tribunal finds that the decision to refuse to remit the administrative penalty was soundly based. The applicant has not established that the Commissioner's refusal of the discretion to remit should not have been made or should have been made differently.

Decision

129. The Tribunal affirms the decisions under review.


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