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VUONG v FC of T

Members:
DG Hughes M

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2014] AATA 402

Decision date: 23 June 2014

Dr G Hughes (Member)

REASONS FOR DECISION

23 June 2014

1. The applicant was 49 years old in 2008 when he received notice of redundancy from his employer, Pacific Dunlop Limited after 19 years of employment.

2. The applicant was born in North Vietnam where his education had been disrupted during the war years. He had developed no apparent command of the English language.

3. The applicant had become a member of Equipsuper Superannuation Fund (Equipsuper) on 11 December 1989.

4. In September 2008, the applicant was introduced by work colleagues to a person known as Brendon Phuong Tran (Phuong). Phuong informed the applicant that he could withdraw his superannuation early, subject to payment of a fee at 29 per cent of the superannuation payout. The applicant did not satisfy any of the factors which would entitle him to an early withdrawal of his superannuation. The applicant had little understanding of the process proposed by Phuong and simply did as he was told - this included signing a blank document which purported to be a roll-over request form from Equipsuper to Nguyen Superannuation Fund

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(Nguyen). Both Equipsuper and Nguyen are complying funds.

5. By committing to this transaction, the applicant became the unwitting victim of a scam. The document which purported to be a rollover request form was fraudulent, containing the correct ACN for Nguyen but a false address.

6. In response to the rollover request form, Equipsuper issued a roll-over benefit statement for the applicant's entire preserved superannuation benefit on 26 September 2008. Equipsuper subsequently sent a cheque in the amount of $114,697.23, payable to Nguyen, to the incorrect address contained on the fraudulent form.

7. The moneys were paid into a bank account which did not belong to Nguyen. The account had been established, unknown to the trustees of Nguyen, by a person named Van Nghet Nguyen and the identity of Nguyen had been fraudulently used for this purpose.

8. On 10 October 2008, the applicant received $81,434, being an amount equivalent to his total superannuation payout of $114,697.23, less the 29 per cent fee charged. The funds were paid into the applicant's personal bank account in a series of transactions (plus one payment which was mistakenly made to a friend's bank account and which was refunded to the applicant by the recipient).

9. The applicant approached his tax agent, Mr Ty Sam, to prepare his tax return for the financial year ending 30 June 2009. He advised Mr Sam that the funds had been received in the form of an early superannuation payout. Mr Sam considered it improbable that the funds represented the applicant's superannuation payout because there was no apparent basis upon which he would have been eligible for an early withdrawal. He accordingly requested the applicant to obtain further documentation relating to the transaction.

10. Mr Sam did not include the sum of $81,434 in the applicant's tax return due to the absence of supporting documentation. Mr Sam's intention was to lodge an amendment to the applicant's tax return with the correct information once the applicant produced documentation which clarified the status of the payments received.

11. The applicant did not provide Mr Sam with further documentation and his tax return for the year ending 30 June 2009 was not subsequently varied as initially anticipated. There is evidence that the applicant approached Nguyen, the police and the respondent but no light could be shed upon the whereabouts of Phuong or the balance of the funds.

12. In 2011, the respondent conducted an audit of the applicant's tax affairs. As a consequence, on 11 July 2011 the respondent issued the applicant a notice of amended assessment, which included the amount of $114,697.23 as the applicant's assessable income, resulting in a tax shortfall of $45,298.64. The respondent had also imposed a shortfall interest charge of $2,896.46.

13. On 11 July 2011 the respondent also issued the applicant a notice of assessment of shortfall penalty, which included an administrative penalty of $11,324.65, being 25 per cent of the shortfall amount, on the basis that the applicant made a false or misleading statement and that he or his agent had failed to take reasonable care in preparing his tax return for the relevant year.

14. On 1 February 2012 the applicant objected to the imposition of the 25 per cent administrative penalty (first objection).

15. On 21 September 2013 the applicant objected to the inclusion of the amount of $114,697.23 in his assessable income (second objection). The applicant asserted that, if the amount of $114,697.23 were to form part of his assessable income, he should be entitled to a deduction of $33,262, being 29 per cent of the sum withheld by the perpetrators and which was ostensibly Phuong's fee, as an expense incurred in deriving assessable income.

16. On 27 March 2012 the respondent decided to disallow in full the applicant's first objection and on 21 November 2013 the respondent decided to disallow in full the applicant's second objection.

17. In July and December 2013, the applicant lodged applications for review seeking a review of the Commissioner's decisions by this Tribunal.

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Legislation

18. Section 6-5 of the Income Tax Assessment Act 1997 (ITAA97) defines the term derived as meaning:

In working out whether you have derived an amount of * ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

(Emphasis in original).

19. Section 6-10 of the ITAA97, which deals with statutory income, relevantly provides:

6-10 Other assessable income (statutory income)

  • (1) Your assessable income also includes some amounts that are not *ordinary income.

    Note: These are included by provisions about assessable income.

    For a summary list of these provisions, see section 10-5.

  • (2) Amounts that are not *ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income .

    Note 1: Although an amount is statutory income because it has been included in assessable income under a provision of this Act, it may be made exempt income or non-assessable non-exempt income under another provision: see sections 6-20 and 6-23.

    Note 2: Many provisions in the summary list in section 10-5 contain rules about ordinary income. These rules do not change its character as ordinary income.

  • (3) If an amount would be *statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.

(Emphasis in original).

20. Section 8-1(1) of the ITAA97 provides:

  • (1) You can deduct from your assessable income any loss or outgoing to the extent that:
    • (a) it is incurred in gaining or producing your assessable income; or
    • (b) it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income.

(Emphasis in original).

21. Section 8-1(2) of the ITAA97 provides:

  • (2) However, you cannot deduct a loss or outgoing under this section to the extent that:
    • (a) it is a loss or outgoing of capital, or of a capital nature; or
    • (b) it is a loss or outgoing of a private or domestic nature; or
    • (c) it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or
    • (d) a provision of this Act prevents you from deducting it.

22. Section 304-10 of the ITAA97 provides:

  • (1) Include in your assessable income the amount of a * superannuation benefit if:
    • (a) any of the following applies:
      • (i) you received the benefit from a * complying superannuation fund or from a * superannuation fund that was previously a complying superannuation fund;
      • (ii) the benefit is attributable to the assets of a complying superannuation fund or from a superannuation fund that was previously a complying superannuation fund; and
    • (b) any of the following applies:
      • (i) the fund was not (when you received the benefit) maintained as required by section 62 of the Superannuation Industry (Supervision) Act 1993 ;
      • (ii) you received the benefit otherwise than in accordance with payment standards prescribed under subsection 31(1) of the Superannuation Industry (Supervision) Act 1993 .
  • (2) Include in your assessable income the amount of a * superannuation benefit if:
    • (a) any of the following applies:
      • (i) you received the benefit from a * complying approved deposit fund or from an * approved deposit fund that

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        was previously a complying approved deposit fund;
      • (ii) the benefit is attributable to the assets of a complying approved deposit fund or from an approved deposit fund that was previously a complying approved deposit fund; and
    • (b) you received the benefit otherwise than in accordance with payment standards prescribed under subsection 32(1) of the Superannuation Industry (Supervision) Act 1993.
  • (3) Include in your assessable income the amount of a * superannuation benefit you receive from an * RSA in breach of the Retirement Savings Accounts Act 1997 , regulations under that Act or payment standards prescribed under subsection 38(2) of that Act.
  • (4) However, you do not have to include the amount in your assessable income to the extent that the Commissioner is satisfied that it is unreasonable that it be included having regard to:
    • (a) for subsection (1) or (2)--the nature of the fund; and
    • (b) any other matters that the Commissioner considers relevant.
  • (5) For the purposes of this section, treat your receipt of a benefit (other than a * superannuation benefit) out of, or attributable to, the assets of a * superannuation plan as your receipt of a superannuation benefit.

23. Section 307-15(2) of the ITAA97 provides:

  • (2) A payment is treated as being made to you, or received by you, if it is made:
    • (a) for your benefit; or
    • (b) to another person or to an entity at your direction or request.

Note: Paragraph (b) would cover, for example, a direction by you that a payment be rolled over from your original superannuation fund into another superannuation fund

24. Section 31(1) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) provides:

31 Operating standards for regulated superannuation funds

  • (1) The regulations may prescribe standards applicable to the operation of regulated superannuation funds (funds) and to trustees and RSE licensees of those funds.

(Emphasis in original).

25. The regulations referred to in section 31(1) take the form of the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations), and Schedule 1 - Conditions of release of benefits to the SIS Regulations lists the circumstances (set out as items 101 to 114 in a table) in which superannuation benefits may be released.

26. Section 284-75(1) of Schedule 1 to the TAA provides:

Liability to penalty

  • (1) You are liable to an administrative penalty if:
    • (c) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a * taxation law (other than the * Excise Acts); and
    • (d) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.

27. Section 284-90 of Schedule 1 of the TAA provides:

  • (1) The base penalty amount under this Subdivision is worked out using this table and section 284-224 if relevant:

Base penalty amount
Item In this situation: The base penalty amount is:
1 You have a ‡ shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, resulted from intentional disregard of a ‡ taxation law (other than the ‡ Exise Acts) by you and your agent. 75% of your ‡ shortfall amount or part

Base penalty amount
Item In this situation: The base penalty amount is:
2 You have a ‡ shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a ‡ taxation law (other than the ‡ Excise Acts) 50% of your ‡ shortfall amount or part
3 You have a ‡ shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a ‡ taxation law (other than the ‡ Excise Acts) 25% of your ‡ shortfall amount or part

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28. Section 294-20(1) of Schedule 1 to the TAA provides, in relation to administrative penalties:

  • (1) The Commissioner may remit all or part of the penalty.

Tribunal's Deliberations

Was the amount of $114,697.23 part of the applicant's assessable income?

29. The respondent contended that the amount of $114,697.23 formed part of the applicant's assessable income in the relevant year because it was a superannuation benefit under section 304-10 of the ITAA97 or, alternatively, because it was income according to ordinary concepts and therefore assessable income pursuant to section 6-5 of the ITAA97.

30. Of specific relevance to this application is section 304-10(1) of the ITAA97, which provides that assessable income includes the amount of the superannuation benefit received from, or attributable to, the assets of a complying superannuation fund in circumstances where the benefit has been received otherwise in accordance with payment standards prescribed under section 31(1) of the SIS Act.

31. Section 307-15(2) of the ITAA97 provides that a superannuation benefit is treated as having been made to the taxpayer if the payment is made for the taxpayer's benefit or to another person or entity at the taxpayer's request.

32. From the respondent's perspective - and the Tribunal accepts this contention - the requirements of section 304-10(1) have been satisfied in the present instance. Equipsuper is a complying superannuation fund. The applicant received the benefit of the payment because, in accordance with section 307-15(2), Equipsuper made the payment to another person at the applicant's request. As discussed below in paragraphs 37 and 38, the applicant received the benefit otherwise than in accordance with the payment standards prescribed by the SIS Regulations.

33. In this regard, the applicant contended that he intended to roll over his superannuation benefit to a complying superannuation fund. The respondent countered this by pointing to previous statements made by the applicant indicating that he intended to access his superannuation early. In the Tribunal's opinion, neither of these submissions is ultimately to the point. The Tribunal accepts that it was always

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the applicant's intention to access his superannuation early, but the Tribunal does not accept that he intended to do so unlawfully.

34. The applicant was ignorant as to the law and was led to believe that if he rolled over his superannuation from one fund to another, a consequence would be that he would have a lawful entitlement to access it. His ultimate, albeit naïve, objective is not relevant in this context - the fact is that he received the payment when the Equipsuper cheque was deposited in the fraudulent bank account and, being a benefit received otherwise than in accordance with the SIS Regulations, the full amount of that deposit should have been included in his assessable income.

35. The applicant contended that as the amount of $81,435.13 was received from an unknown source fund, not a complying superannuation fund, it cannot be assumed that the amount represented the balance of his superannuation benefit of $114,697.23. This assumes, however, that the applicant's obligation to include the amount in his tax return arose only after receipt of the payments from the fraudulent account but in fact the obligation arose, pursuant to section 304-10(1) of the ITAA97, at the time the moneys were paid into the fraudulent account.

36. The Tribunal's conclusion that the entire amount of the payment made by Equipsuper formed part of the applicant's assessable income is consistent with decisions previously reached by the Tribunal in
Sinclair and Commissioner of Taxation [2012] AATA 634 and also
Brazil and Commissioner of Taxation [2012] AATA 192.

37. In order to fall within section 304-10(1), it is of course a condition that the benefit was received by the applicant otherwise than in accordance with payment standards prescribed under section 31(1) of the SIS Act.

38. It was not seriously advanced on behalf of the applicant that any of the conditions of release itemised in Schedule 1 to the SIS Regulations had been met, although the point was not formally conceded.

39. It was intimated on behalf of the applicant that there might be grounds for establishing severe financial hardship as set out in item 105 of Schedule 1 to the SIS Regulations. The fact is, however, that despite evidence (sometimes contradictory) given by the applicant to the effect that he was experiencing financial hardship at the time, this is unlikely to have been the case given the fact that at the time of his termination he received a retrenchment payment of $157,298.49. More fundamentally, item 105 does not apply in the applicant's circumstances because there is no evidence that he was in receipt of Commonwealth income support payments as required by the definition of severe financial hardship in Regulation 6.01(2) of the SIS Regulations.

40. Similarly the Tribunal does not accept the argument intimated on behalf of the applicant that compassionate grounds as set out in item 107 of Schedule 1 to the SIS Regulations existed which would justify early release of his superannuation entitlement, notwithstanding evidence of medical expenses incurred by the applicant in respect of his wife and parents, and ultimately funeral and burial expenses associated with the death of his parents. These circumstances are not relevant in the present context because it was acknowledged by the applicant under cross-examination that the events all occurred subsequent to his receipt of the benefit.

41. Given the Tribunal's conclusion on this point, it is not necessary to consider the respondent's alternative contention that the amount of $114,697.23 was income according to ordinary concepts and therefore assessable income pursuant to section 6-5 of the ITAA97.

Deduction for Phuong's expenses

42. The applicant has the burden of establishing that there had been a loss or outgoing, and that some or all of the loss or outgoing was incurred by the applicant in gaining or producing his assessable income, in order to claim a deduction under s 8-1(1) of the ITAA97. Unsurprisingly in the circumstances, there is no evidence of agreement or other written documentation in support of the fact that the amount was paid to Phuong, nor have any witnesses to the transaction been identified. The Tribunal accepts the respondent's contention on this point that there is in fact no evidence as to how the sum of $33,262 was applied - all that can be conclusively established is that it was withheld from the applicant and presumably misappropriated.

43.

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The Tribunal is not satisfied that the amount of $33,162 allegedly retained by Phuong should be considered deductible.

44. Given the Tribunal's finding on this issue, it is not necessary to consider the respondent's further submissions in relation to whether any expense of $33,262 was in fact of a capital nature or of a private or domestic nature.

Administrative penalty

45. Pursuant to section 284-75 of Schedule 1 to the TAA, a taxpayer is liable to pay an administrative penalty if a statement is made which is false or misleading in a material particular, whether because of things in it or things omitted from it.

46. Section 284-90 of Schedule 1 to the TAA sets out the base penalty amounts which are dependent on the level of care shown by the entity or its agent. A base penalty amount of 25 per cent of the shortfall amount is imposed when an entity or its agent fails to take reasonable care to comply with the ITAA97.

47. It was pointed out to the Tribunal on behalf of the applicant that the case involved unusual and unforeseeable circumstances, and this is undoubtedly the case. The respondent contended, on the other hand, that the applicant and his agent had failed to give adequate attention to the taxpayer's obligations under the ITAA97.

48. The applicant had not consulted with his tax agent at the time he accessed his superannuation benefit and did not make reasonable enquiries (including making enquiries of Equipsuper and Nguyen), nor did he seek guidance from the Australian Taxation Office, before embarking upon the transaction. The respondent also pointed to the absence of documentation from Phuong or Nguyen in relation to the purported rollover, and also the relative size of the payment involved which in turn should have warranted greater care and attention from the applicant.

49. The respondent also pointed to the fact that the applicant's tax agent failed to make adequate inquiries of Equipsuper in order to verify the applicant's understanding of his superannuation payout entitlement, and made a conscious decision to omit the amount of the superannuation benefit from the applicant's assessable income when, as an alternative, the amount could have been included as a precautionary measure.

50. The Tribunal does not consider that the applicant's tax agent should necessarily have made more extensive inquiries, or acted in a more proactive manner than he did in advising the applicant on his tax affairs. It is, however, impossible to avoid the conclusion that, looking at the circumstances as a whole, the consequences could have been avoided if greater care had been taken by the applicant. It is pertinent in this regard to note the observations made by Greenwood J in
Aurora Developments v Federal Commissioner of Taxation [No. 2] (2011), at 465-466:

It follows as a matter of principle that the reasonable care test calls upon a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer in fulfilling the taxpayer's tax obligations. The test looks to whether such a person would have foreseen, as a reasonable probability or reasonable likelihood, the prospect that the action or step or the failure to act or take an affirmative step would result in a shortfall amount and in determining that question, a relevant factual inquiry is whether the taxpayer made the reasonable attempts of a person in the position of the taxpayer ought to have taken so as to comply with the provisions of a taxation law.

51. It is the Tribunal's view that a reasonable person, even after taking into account the taxpayer's limited education and lack of knowledge of taxation affairs, should have done more in order to ensure compliance with his taxation obligations. All the evidence suggests that the applicant was sufficiently intelligent to understand the need to prepare and file an annual tax return and the need to disclose all that he received, including a superannuation payout. Given this degree of awareness, it is significant that there was no attempt made, after his tax return for the relevant year had been filed, to account for the $81,434 which he had received, let alone the full benefit of $114,697.23.

52. For this reason, the Tribunal considers that the 25 per cent penalty imposed by the Commissioner was appropriate.

53.

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The Tribunal nevertheless considers that the respondent should use its discretion to remit the penalty in full.

54. It is the Tribunal's opinion that the applicant has suffered greatly and disproportionately in the circumstances where he is culpable only of pronounced naivety, unaccompanied by duplicitous intentions.

55. The Tribunal is mindful of the respondent's contention that the applicant was a willing party to the arrangement, made insufficient enquiries, did not seek supporting documentation and, had it not been for a tax audit, the shortfall would have gone unnoticed.

56. The Tribunal is nevertheless persuaded that the applicant at all times acted with honest, albeit naïve, intent. He was seeking to access his superannuation early, but by legitimate means. He gave the appearance when giving evidence of being an honest individual who was aware of the need to comply with taxation laws, as he had done for all of his working life. He brought the payment to the attention of his tax agent who, in turn, acted quite properly in identifying that further clarification as to the nature of the payment was required. He understood the rollover request form to be a bona fide document (even if he did not understand the legal implications of the document) and it is notable that even Equipsuper saw nothing obviously untoward in the signed document because it dispatched the cheque to the fraudulent account referred to on the face of the document.

57. For this reason, the Tribunal considers a 25 per cent penalty imposed under section 284-90 of Schedule 1 to the TAA should be remitted in full.

Decision

58. The Tribunal affirms the decision under a review, save that it considers the 25 per cent administrative penalty imposed upon the applicant pursuant to section 284-90 of Schedule 1 to the TAA should be waived pursuant to the Commissioner's discretion under section 298-20(1) of Schedule 1 to the TAA.


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