• The impact of this case on ATO policy is discussed in Decision Impact Statement: Bell v Deputy Commissioner of Taxation (M40 of 2013 (High Court) VID 792/2012 (Full Federal Court) VID 151/2012 (Federal Court) 2010/3362 (Administrative Appeals Tribunal)).

BELL v FC of T

Members:
F O'Loughlin SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2012] AATA 45

Decision date: 30 January 2012

---

Mr Frank O'Loughlin, Senior Member

1. Throughout the 2007 financial year the Applicant was, among other things:

• (a) a beneficiary within the terms of the Bell Family Trust deed of settlement;

  ---

  ATC 4564

• (b) the sole shareholder and director of its trustee company and the holder of the offices of appointor and guardian of the Bell Family Trust;
• (c) the recipient of all of the income (an amount defined to include capital gains included in calculating the net income of the trust for the purposes of s 95(1) of the Income Tax Assessment Act 1936 (C'th)) distributed by the trustee of the Bell Family Trust for the 2007 financial year; and
• (d) a director of Barry Plant Holdings Pty Ltd (the trustee of the Barry Plant Holdings Unit Trust).

2. On 14 March 2007 the trustee of the Bell Family Trust sold the units it held in the Barry Plant Holdings Unit Trust and the Plant Bell Unit Trust and made a capital gain in excess of $6 million before adjustments for the CGT discount, which is not in contention, and for the small business concessions in Division 152 of the Income Tax Assessment Act 1997 (C'th), which are in dispute.

3. The Applicant contends that two of the small business concessions are available to reduce the taxable amount of the capital gain. The Commissioner contends that the maximum net asset value test has not been met and none of the small business concessions are available. Consequently, the Commissioner has assessed the Applicant in respect of all of the s 95 net income of the Bell Family Trust including the capital gain calculated without the benefit of the small business concessions applying.

4. Following the evidence adduced at and before the hearing of this review, the Commissioner and the Applicant have reduced their differences in opinion concerning the assets and liabilities to be taken into the maximum net asset value calculation to those set out in Table 1 below.

Table 1 Assets of the Bell Family Trust and its connected entities and affiliates
	APPLICANT'S CONTENTION $	COMMISSIONER'S CONTENTION $
BELL FAMILY TRUST
36,000 shares in Barry Plant Group Pty Ltd	36,000	36,000
144 shares in Barry Plant Holdings Pty Ltd	144	144
170 'D' class units in Barry Plant Holdings Unit Trust	4,069,831	4,069,831
50 ordinary class units in Plant Bell Unit Trust	2,394,019	2,394,019
Less amount due to Barry Plant Holdings Unit Trust	-2,018,000	0
6 shares in Plant Bell Pty Ltd	6	6
600 units in 1300 Phonewords Australia Unit Trust	600	Nominal
Less liability to Barry Plant Holdings Unit Trust	-591,840	0
Beneteau Antares Yacht	725,000	725,000 ATC 4565
Less hire purchase debt	-815,446	-815,446
Undrawn distribution due from Barry Plant Holdings Unit Trust	334,686	334,686
Less advances on distributions	−549,000	Not asserted
Swagman Motor Home	370,000	370,000
Less hire purchase debt	-415,445	370,263*1
BELL INVESTMENT TRUST
Doncaster property	126,789	126,789
CHRISTOPHER BELL
Property - Martha Cove, Safety Beach	1,650,000	1,650,000
Less mortgage loan	-1,212,000	-1,212,000
SHIRLEY COTTERILL
Cash held in Adelaide Bank account	166,288	1,252,112
Net assets	4,121,632	Exceeds $5m
*1 The Commissioner accepts that the liability is $370,263 adjusted for the period from 9 March 2007 to 14 March 2007 to be estimated by Tribunal.

5. The assets and liabilities in contention are:

• (a) whether the debt of $2,018,000, claimed to be owed by the Bell Family Trust to the Barry Plant Holdings Unit Trust, should be included in the maximum net asset value calculations;
• (b) the amount of the balance in the Adelaide Bank account to be included in the maximum net asset value calculations;
• (c) the amount of the Swagman Motor Home hire purchase debt to be included in the maximum net asset value calculations;
• (d) the amount owed to the Barry Plant Holdings Unit Trust on account of advances on income entitlements to be included in the maximum net asset value calculations;
• (e) whether the debt of $591,840 claimed to be owed to the Barry Plant Holdings Unit Trust on account of advances made to two other trusts (the 1300 Phonewords Australia Unit Trust and the 1300 Phonewords Unit Trust (the 1300 Phonewords Trust) is properly included in the maximum net asset value calculations

6. The Applicant and the Commissioner do not dispute who the relevant connected entities and affiliates are. The issues in dispute concern the amounts of assets and liabilities which should be included in the maximum net asset value calculation and whether particular amounts which the Applicant contends are liabilities are to be included at all.

The $2,018,000 debt

7. In October 2006 the Applicant decided to take advantage of the then available opportunity to make a non-concessional contribution of $1 million to his superannuation fund. He also decided to provide his (then de facto) spouse with financial security by providing her with sufficient funds to pay off the outstanding debt on their principal residence. The residence and mortgage debt were both registered in her name and, with her employment having been recently terminated because her job had been made redundant in August 2006, the Applicant's spouse had no independent means to service or repay that debt.

8. In October 2006 through to March 2007, to the extent the Applicant had access to assets, it was access to the assets of the Bell Family Trust and those assets were principally the units in the Plant trusts. The Bell Family Trust was the source of funds that the Applicant needed to make the superannuation contribution and payment to his spouse and it had sufficient wealth to distribute to enable the Applicant to do so.

9.

---

ATC 4566

In October 2006, as director of the trustee of the Bell Family Trust, and following discussions with his accountant and tax agent, the Applicant resolved to distribute $2,018,000 from the capital of the Bell Family Trust to himself as a beneficiary of that trust. The Bell Family Trust did not have sufficient cash reserves to pay the capital distribution amount to the Applicant. Again after discussions with his accountant and tax agent, the Applicant concluded that he would need either to sell units in the Plant trusts or to borrow to make this payment.

10. In March 2007, with the consent of the other directors of Barry Plant Holdings Pty Ltd (the trustee of the Barry Plant Holdings Unit Trust), a Macquarie Bank loan facility which was available to Barry Plant Holdings Pty Ltd was made available to the Bell Family Trust to the extent of $2,018,000 with repayment of any amount borrowed to be made by the Bell Family Trust. Macquarie Bank made payments directly to the Applicant's spouse's bank account with Adelaide Bank and to the Applicant's superannuation fund.

11. Barry Plant Holdings Pty Ltd recorded the payments as a loan to it by Macquarie Bank and then as a loan by it to the Bell Family Trust. At least initially, the bookkeeping within the Bell Family Trust did not record these steps correctly and the Applicant's accountant acknowledged the error and that the accounting records should, at the outset, have reflected a loan to the Bell Family Trust from Barry Plant Holdings Pty Ltd and a distribution of capital to the Applicant, consistent with his discussions with the Applicant some months earlier. Recognising that participants in transactions attended by a lack of formality in transaction documentation and incorrect recording in financial records do so at their peril, here there is corroboration of the Applicant's contentions by a disinterested person and those contentions can be accepted.

12. The Commissioner contends that there could not have been a capital distribution as claimed. In support, he contends that:

• (a) there is no evidence of a capital distribution being made during the 2007 year in the general ledger and financial statements of the Bell Family Trust (a contention dealt with above);
• (b) the Bell Family Trust only had net assets and capital of $50 before the purported capital distribution in October 2006, which means that there was insufficient trust capital to make a capital distribution of $2,018,000 at that time;
• (c) the increases in value of the Barry Plant Assets resulted in gains when those assets were disposed of in March 2007; and
• (d) those gains were income in accordance with the trust deed.

13. The latter three contentions ignore the facts that the Bell Family Trust had units in the Plant trusts which had substantial unrealized value in excess of the capital said to have been distributed, and that it was only the taxable amounts of any gains that should be treated as income of that trust pursuant to the trust deed. The discount elements^[1] See Division 115 of Part 3-1 of the Income Tax Assessment Act 1997 (C’th) of any gains were not affected by the terms of the definition of income in the trust deed.

14. Further, by parity of reasoning with:

• (a) a beneficiary's ability to be entitled to trust income before both completion of accounts required to calculate it and that income being held in a form enabling immediate payment;^[2] Federal Commissioner of Taxation v Totledge Pty Ltd 82 ATC 4168 ; (1982) 12 ATR 830 at p 839 per Judges: Bowen CJ Deane and Fitzgerald JJ and
• (b) entitlements to immediate payment, without the necessity of demand, of trust income resolved to be paid or applied for a beneficiaries' benefit upon the trustee having liquid resources to make payment,^[3] See East Finchley Pty Ltd v Federal Commissioner of Taxation 89 ATC 5280 ; (1989) 20 ATR 1623 at 1635, per Hill J

a beneficiary in whose favour a trustee resolves to distribute capital ought be in no different a position. The resolution made in the present circumstances can be taken to have created this entitlement.

15. The Commissioner also criticised the Applicant's contentions that there had been a valid resolution to distribute capital of the Bell Family Trust on the basis of the lack of formality actually adopted in the process of doing so and the provisions of the trust deed and the Corporations Act 2001 (C'th) which allow capital distributions to be effected by resolution and which allow resolutions to be made by recording them and signing the record of them. However, these provisions do not

---

ATC 4567

prevent steps being taken by less formal means.^[4] See Federal Commissioner of Taxation v Vegners 89 ATC 5274 ; (1989) 20 ATR 1645

16. Whether the $2,018,000 liability of the Bell Family Trust to the Barry Plant Holdings Unit Trust at 14 March 2007 can be taken into the maximum net asset value calculation then turns on whether it related to an asset that is taken into the calculation.

17. The Applicant contends that the Bell Family Trust had an obligation to pay the distributed capital amount to the Applicant and that that obligation attached to the whole trust fund and related to the assets of the trust within the meaning of section 152-20 of the 1997 Assessment Act because the loan preserved and freed up the assets of the trust and in that sense related to the assets of the Bell Family Trust.

18. The Commissioner contends to the contrary. He contends that the liability did not relate to any particular asset of the Bell Family Trust or to its assets in general.

19. The liability related to a discharge of resolutions and obligations to distribute capital. The debts incurred to the Barry Plant Holdings Unit Trust arose out of considerations that were independent of the assets of the Bell Family Trust and too remote for the necessary relationship to exist. The requirement for a liability to be related to an asset taken into the maximum net asset value test does not encompass every conceivable relationship, no matter how remote or tenuous.^[5] Tingari Village North Pty Ltd and Commissioner of Taxation 2010 ATC ¶10-131 ; [2010] AATA 233 at [55] Incurring a debt so as to preserve or retain assets when the debt funds are used for purposes quite separate from the relevant assets is not a sufficient relationship for the purposes of s 152-20. If it were the scheme of the maximum net asset value test would be readily frustrated by an entity with assets included in the test valued above the threshold, and no other assets or liabilities, who could borrow to pursue an objective that does not produce an asset to be included in the test and then claim the borrowings on the basis that assets would need to have been realised to pursue that objective.

20. The $2,018,000 liability is not to be counted in the maximum net asset value calculation.

The $591,840 guarantee amount

21. The Bell Family Trust was a 50 per cent owner of the 1300 Phonewords Trusts, which borrowed money from the Barry Plant Holdings Unit Trust. The Bell Family Trust and the Applicant guaranteed those borrowings as to 50 per cent. The Bell Family Trust sold its units in these trusts in April 2007 and at that time paid out $591,840, being 50 per cent of the 1300 Phonewords Trusts' debt.

22. Any guarantee liability as at 14 March 2007 was a contingent liability and not a presently existing legal obligation. Contingent liabilities are not liabilities for the purposes of the maximum net asset value test.^[6] See Tingari Village North Pty Ltd and Commissioner of Taxation 2010 ATC ¶10-131 ; [2010] AATA 233 ; Cannavo and Commissioner of Taxation 2010 ATC ¶10-147 ; [2010] AATA 591 at [14]. The need to make specific provision allowing provisions for leave and other emerging obligations in the maximum net asset value test gives insight into the type of liabilities that are included, namely, presently existing liabilities.

The motor home debt: $415,445 OR $370,263plus adjustment?

23. One of the assets of the Bell Family Trust was a motor home held pursuant to a partly performed hire purchase arrangement. The Applicant contends that the hire purchase liability was $415,445 for the purposes of the maximum net asset value test. The Commissioner contends the liability is in the order of $370,263 plus adjustments to be estimated by the Tribunal.

24. The Tribunal cannot accept the Applicant's contention.

25. The amount of $415,445 contended for by the Applicant, while having a basis, is derived from a statement of hire purchase liability that starts with an opening balance of $580,096.62 reduced for payments actually made. The flaw in the logic underlying the Applicant's contention is that the $580,096.62 is the total of hire purchase payments to be made over the life of the hire purchase contract. The $580,096.62 assumes the hire purchase contract will run its full term and does not purport to represent a liability amount if the contract were to be paid out at any point in time, the relevant point of time in this matter being just before the CGT event - 14 March 2007.

26. The only evidence of what might be a payout figure for the hire purchase liability as at 14 March 2007 is the amortization table showing closing balances of liabilities as at 9 March 2007 and 9 April 2007 ($370,263.00 and

---

ATC 4568

366,524.98 respectively, with the interest obligation for the month to 9 April 2007 being $2,097.88 or $67.67 per day). A reasonable estimate of the amount required to be paid as at 14 March 2007 is the 9 March balance of $370,263.00 plus interest of $338.35 (i.e. $67.67 per day for 5 days) - a total of $370,601.35.

The overdrawn income distribution liability

27. The Bell Family Trust received advance distributions of income from the Barry Plant Holdings Unit Trust. As at 14 March 2007 those distributions were in excess of its entitlements. The entitlement from that trust has been included as an asset and the liability is appropriately included in the maximum net asset value calculation. The only issue in question is the amount.

28. Evidence form a fellow director of Barry Plant Holdings Pty Ltd was that the amount owed was $567,000 and that the amount owed to Macquarie Bank was $2 million, a total of $2,567,000. In his revised schedule of assets and liabilities the Applicant's accountant indicated the advanced drawings balance was $549,000 and that the amount owed to Macquarie Bank was $2,018,000 a total of $2,567,000. The Macquarie Bank statement showed that the $2,018,000 amount was correct.

29. The $549,000 amount can be accepted for present purposes.

Adelaide Bank account balance: $1,252,112 or $166,288?

30. The Commissioner contends that the Adelaide Bank account shows that the Applicant had a cash asset of $1,252,112 which must be taken into account for the purposes of the maximum net asset value test, and a loan liability of $1,085,824 which related to the acquisition of a main residence and hence must be excluded.

31. The Applicant contends that his spouse held a single account which was in credit. The loan facility was for $1,085,824 but, because the account was in credit, the Applicant's spouse was able to draw up to $1,252,112. Put simply, the Applicant contends that there was a credit balance of $166,288, that this is the only relevant asset, and that the ability to borrow is not an asset for the purposes of the maximum net asset value test.

32. The balance of the evidence does not support the Applicant's contention. An Adelaide Bank advice on which the Applicant relies described a Total Balance Outstanding (Loan minus Offset) of $1,608.24 as at 1 April 2007. However, that advice showed that the balance comprised a Loan Balance and an Offset Balance, an amount of interest that would have accrued and an Offset benefit (interest saved) and a net interest accrual for a month. Such a presentation does not suggest a single account. If there was only one account, a single balance could be expected and little, if any, purpose is served by identifying amounts of interest that would have accrued and interest that has been saved. Other Adelaide Bank records disclose two accounts with separate account numbers, one with a debit balance and one with a credit balance. Further, those records show that there were transfers between the accounts. These records are not consistent with an assertion that there was a single facility that was $166,288 in credit.

33. The account with the debit balance reflects borrowings used to purchase the Applicant's residence (owned by his spouse). This asset is not included in the maximum net asset value calculation. Accordingly, the debt of $1,085,824 is not included either. The fact of multiple accounts with the one institution, with or without an interest offset link or arrangement, does not of itself make an account with a debit balance a liability related to another account with a credit balance. If funds in the credit balance account are the product of drawings from the debit balance account, then the liability would relate to the asset. In the present circumstances, the liability has its origins in moneys borrowed to purchase a residence. It is that asset to which it is related.

34. The Commissioner's contention that the cash asset of $1,252,112 must be taken into account for the purposes of the maximum net asset value test is correct.

Conclusion

35. For the foregoing reasons the assets and liabilities that are to be included in the maximum net asset value test are set out in Table 2 below.

Table 2 Tribunal's maximum net asset value conclusions
ASSETS AND LIABILITIES	CONCLUSION $
BELL FAMILY TRUST
36,000 shares in Barry Plant Group Pty Ltd	36,000
144 shares in Barry Plant Holdings Pty Ltd	144
170 'D' class units in Barry Plant Holdings Unit Trust	4,069,831
50 ordinary class units in Plant Bell Unit Trust	2,394,019
Less amounts due to Barry Plan Holdings Unit Trust	0
6 shares in Plant Bell Pty Ltd	6
600 units in 1300 Phonewords Australia Unit Trust	600
Less liability to Barry Plant Holdings Unit Trust	0
Beneteau Antares Yacht	725,000
Less hire purchase debt	-815,446
Undrawn distribution due from Barry Plant Holdings Unit Trust	334,686
Less amounts due to Barry Plant Holdings Unit Trust	-549,000
Swagman Motor Home	370,000
Less hire purchase debt	-370,601
BELL INVESTMENT TRUST
Doncaster property	126,789
CHRISTOPHER BELL
Property - Martha Cove, Safety Beach	1,650,000
Less mortgage loan	-1,212,000
SHIRLEY COTTERILL
Cash held in Adelaide Bank account	1,252,112
SHIRLEY COTTERILL
NET ASSETS	8,012,394

---

ATC 4569

36. The Applicant has not established that the maximum net asset value test has been passed and accordingly the Commissioner's objection decision concerning this question is affirmed.

Penalties

37. The conclusions above mean that, in filing income tax returns for the 2007 and 2008 years without including the full amount of the net capital gain of the Bell Family Trust, the Applicant or his tax agent made statements that were false or misleading in the relevant sense.

38. Consequently, the Applicant had shortfall amounts for those years.

39. Following the decisions in
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation ^[7] 2001 ATC 4111 ; (2001) 46 ATR 347 at [77] and
Hart v Commissioner of Taxation ^[8] 2003 ATC 4665 ; (2003) 131 FCR 203 at [33] and [43] , the Commissioner contends that adopting positions knowing that there is a real, as opposed to a

---

ATC 4570

fanciful, risk they may be incorrect where the risk is foreseeable by a reasonable person in the position of the person making the statement constitutes recklessness and that is what the Applicant or his tax agent did. The actions or steps that the Commissioner contends constitute recklessness can be categorized as:

• (a) use of incorrect values of certain assets and liabilities;
• (b) incorrect inclusion of particular assets and liabilities including those which constitute the valuation dispute;
• (c) changing the net asset value calculations submitted to the Commissioner on three occasions;
• (d) adopting the position taken in the income tax returns filed after the Applicant and his tax agent were advised that the Commissioner had a different view as to how the net asset value test would apply in the Applicant's circumstances and that the Applicant would be unlikely to pass the test if the Commissioner's view was correct;
• (e) failing to provide when requested certain information to substantiate assets and liabilities as sought by the Commissioner.

40. The Commissioner also contends that the Applicant's contentions as to the assets and liabilities which should be included for the purposes of the maximum net asset value test are not reasonably arguable.

41. If the contested assets and liabilities at the heart of the disputed net asset value calculation had all been resolved in the Applicant's favour, the net asset value calculation would have been comfortably under the $5 million threshold. This would be the case regardless of which calculation of values of assets and liabilities the Applicant adopted. In these circumstances, it can be accepted that the degree of precision in assertions as to the value of assets and liabilities which did not make a material impact on the calculation might be variable. Less attention might be directed to matters that do not make a material impact on the end result. Accordingly, the variations in calculation contended for do not show recklessness in making the relevant statements in tax returns.

42. The Applicant's failure to include the bank account balance of $1,252,112 in the maximum net asset value calculation, in the circumstances does not constitute recklessness. There was a net of liability balance of $166,288 and there was evidence to support the Applicant's factual contention which has not been accepted after balancing other available evidence.

43. Accordingly, the first three categories of particulars of recklessness contended for by the Commissioner do not necessarily show recklessness.

44. The fifth category of the particulars of recklessness is not relevant to making the false or misleading statement in the tax return filed. If there is any recklessness constituted by these actions then they post-date the making of the false or misleading statement.

45. The fourth category of the Commissioner's particulars of recklessness requires further attention. That category calls for closer attention to the Applicant's and his tax agent's actions in relation to the $2,018,000 Macquarie Bank liability and the $591,840 guaranteed by the Applicant and the Bell Family Trust in respect of the 1300 Phonewords Trusts' debt liabilities. These are matters of analysis and application of the 1997 Assessment Act to given facts.

46. Adopting a position known to be contrary to the Commissioner's point of view requires careful analysis of the circumstances in which that happens, the actions taken and the foundations for them. If the circumstances are such that the Applicant and his tax agent merely failed to take reasonable care, then it ought not be concluded that they were reckless. Similarly, if the circumstances are such that the Applicant and his tax agent took reasonable care, then, again, it ought not be concluded that they were reckless.

47. A number of observations must be made.

48. Questions of whether a taxpayer or a taxpayer's tax agent has taken reasonable care are inevitably addressed in a setting where the taxpayer and/or the tax agent have adopted a position that is not the correct or preferable one. Accordingly, just because a position adopted was wrong does not mean reasonable care has

---

ATC 4571

not been taken or that recklessness has been demonstrated.

49. As long as positions adopted by the Commissioner are not universally or invariably correct, adopting a position that is contrary to a point of view expressed by the Commissioner does not necessarily demonstrate either carelessness or recklessness. Much depends on the issue in question, the facts of the case and the scope for genuine controversy as to the correct outcome. If there were no basis for contending that an amount was not assessable, adopting a position contrary to that of the Commissioner may well constitute recklessness. However, that is only one end of a spectrum. Adopting a position on a reasoned basis, while contrary to the Commissioner's expressed views, that has a sound rationale in relation to a topic of controversy might sit at the other.

50. In this matter, the sums involved were large relative to the Applicant's income from other sources. In some circumstances that of itself might call for more than the usual amount of care. Here the Applicant can demonstrate that he took that care. First, he consulted a tax agent, who was not sure of the position. He then consulted a solicitor who holds a Master of Taxation degree and who he perceived to have expertise in the area. The solicitor gave advice. Moreover, the solicitor was sufficiently diligent to contact the Applicant after he had given advice to indicate that the Commissioner had issued a determination that contradicted the advice given and that, if that view prevailed, the Applicant would not pass the maximum net asset value test. The solicitor reviewed his advice and confirmed his view, and indicated that in his view the Commissioner was wrong.

51. In some contexts, interest in respect of liabilities incurred so as to allow retention of income producing assets and working capital has sufficient nexus with income-producing activities, or businesses carried on to produce assessable income, to be deductible. The Applicant approaches his analysis of the $2,018,000 debt applying parallel reasoning to conclude that that debt related to the income producing assets (the units in the Plant trusts). Such a contention can be readily understood and such parallel reasoning can understandably be advanced to underpin a conclusion that the Commissioner's view is not correct.

52. Similarly, the $591,840 guarantee amount could be related to the assets included in the maximum net asset value calculation if a less strict view of liability was adopted.

53. The conclusions reached in relation to the $2,018,000 and $591,840 were matters of judgment, not recklessness.

54. Save for the Adelaide Bank account balance, the context in the present case requires the conclusion that the Applicant and his tax agent took reasonable care and adopted a position that, while not correct, could be advanced on a reasoned basis with an expectation that it might be accepted as correct. It was a reasonably arguable position.

55. Whether the Adelaide Bank account balance was $1,252,112 or $166,288 was a question that turned on the detail of the arrangements with the Adelaide Bank. Failure to appreciate the difference between a single facility, as contended for, and two separate accounts, as the records show, was a matter of detail and was a matter of the Applicant taking insufficient care. The position was not reasonably arguable.

56. The Adelaide Bank account balance of $1,252,112 was enough to take the aggregate net asset value over the maximum net asset value test threshold.

57. Accordingly, penalty on the basis of having failed to take reasonable care is the appropriate penalty.

58. The question of remission arises. The position put forward is that the Applicant acted reasonably in the circumstances and took all necessary steps that could be expected. These are not matters that strictly go to remission. Penalty for failing to take reasonable care is set at the 25% rate by the Parliament subject to a power to remit it. The remission power is to be exercised in circumstances where the penalty otherwise payable is inappropriate and/or harsh.

59. The power to remit penalty is a relieving discretion allowing one or more breaches of regulatory provisions to be ignored. Being a relieving discretion, there are two principles that need to be observed:

• ---

  ATC 4572

  (a) first, discretions that are remedial or beneficial in nature ought be given a construction that allows the fullest relief which is open on a fair reading of their terms;^[9] See McAusland v Deputy Federal Commissioner of Taxation ; Antlers Pty Ltd (1993) 47 FCR 369 at 374 per Gummow J and the reference to Devenish v Jewel Food Stores Pty Ltd (1991) 172 CLR 32 at 44 there cited. and
• (b) second, in exercising a discretion it is necessary to have regard to whether its exercise in a particular instance will achieve or frustrate the ends, objects or purposes of the Act.^[10] See Secretary, Department of Social Security v (D A) Smith (1991) 23 ALD 277 at 280 per von Doussa J and the reference there to Re Ivovic v Director-General of Social Services (1981) 3 ALN No 61 at n 96-97.

60. In determining whether an exercise of a discretion would frustrate the objects of an act, it is necessary to understand the objects and underlying policy of the relevant act. Those objects and underlying policy are that taxpayers self assess their income tax liabilities, take care to get the right answer and not be penalised if they don't provided they have not been careless, or worse.

61. Remission for someone who has not taken the requisite care embraces analysis of whether the penalty imposed is harsh in the particular circumstances of the taxpayer - see
Dixon as Trustee for Dixon Holdsworth Superannuation Fund v Commissioner of Taxation.^[11] 2008 ATC ¶20-015 ; [2008] FCAFC 54 ; (2008) 167 FCR 287 at [26] per Spender, Ryan and Emmett JJ There need to be mitigating circumstances that could be regarded as mitigating the taxpayer's behaviour while at the same time recognising the purpose and role that penalties play in a system of self assessment of tax liability - see
Re Hobart Central Child Care Pty Ltd and Commissioner of Taxation.^[12] 05 ATC 2351 ; [2005] AATA 1027 at [205] per Deputy President Forgie

62. In the present matter there is insufficient before the Tribunal to conclude that penalty at the rate of 25 per cent is harsh or should otherwise be remitted.

Decision

63. The Commissioner's decision that the maximum net asset value test was not passed is affirmed and the Commissioner's decision to impose penalty on the recklessness scale of 50 per cent is set aside and replaced with a decision to impose penalty for failing to take reasonable care.