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ADMINISTRATIVE APPEALS TRIBUNAL - SMALL TAXATION CLAIMS

Case [2000] AATA 28

Re Sparks and Federal Commissioner of Taxation

J Block, Senior Member

11, 21 January 2000 - Sydney

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J Block, Senior Member    There are 2 objection decisions which, by agreement between the parties, were heard together by the Administrative Appeals Tribunal (AAT). The objection decision relating to the applicant in Case No. NS1999/91 is the disallowance by the respondent of an objection dated 3 June 1999 against a notice of assessment numbered 288116/001 and issued on 24 March 1999 in respect of the year ended 30 June 1997 (the relevant year). The term "Mr Sparks" is used in these Reasons in respect of the applicant in Case No. NS1999/91.

  2  The objection decision relating to the applicant in Case No NS1991/98 is the disallowance of an objection dated 28 June 1999 against a notice of assessment numbered 288290/035 issued on 4 June 1999 and also in respect of the relevant year. Similarly the term "Mrs Sparks" is used in these Reasons in respect of the applicant in Case No NS1999/98.

  3  

 (a)  Mr Sparks appeared before the AAT both on his own behalf and on behalf of his wife, Mrs Sparks, while Ms Tham Dao, an officer of the respondent, appeared on behalf of the respondent.

 (b)  The AAT had before it the T Documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) (and which are referred to in these Reasons as the "First T Documents" in respect of the T Documents referable to Mr Sparks and the "Second T Documents" in respect of the T Documents referable to Mrs Sparks) together with the following exhibits:

 •  Exhibit R1 is a notice of amended assessment issued on 14 January 1998 in respect of Mr Sparks care of Mr Greg Small of Greg Small & Associates for the year ended June 1996;

 •  Exhibit R2 is a chronology (the chronology) of events prepared by the respondent in respect of the relevant year returns;

 •  Exhibit R3 is a document generated by the respondent indicating the date of lodgment of returns for the relevant year in respect of both applicants.

 (c)  It was agreed between the parties at the commencement of the hearing that there was no issue between the parties as to the amounts assessed against the applicants, and that the only issue was as to the percentage of additional tax assessed against them. This arose in consequence of certain differences in the figures referable to the applicants respectively and noted by the AAT when considering the T Documents. The AAT was advised that it need not be concerned with any such discrepancies (which were in any event more apparent than real), and having regard inter alia to the fact that the assessments referable to the applicants were not issued at the same time.

 (d)  The term "additional tax" with which the AAT is concerned relates only to the culpability component of the additional tax assessed against the applicants; as set out later in these Reasons the AAT does not have jurisdiction to consider the interest component of such additional tax.

  4  The legislative provisions which are relevant for the purposes of these Reasons are as follows:

 (a)  Section 226G of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applies where a tax shortfall was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with the ITAA 1936 or the regulations; that section reads as follows:

   

226G Subject to this Part, if:

 (a)  a taxpayer has a tax shortfall for a year; and

 (b)  the shortfall or part of it was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part.

 (b)  Section 226X (which relates only to the additional tax assessed in respect of Mr Sparks) applies, inter alia, where a taxpayer has been penalised in a prior year for a tax shortfall, and reads as follows:

   

226X If:

 (a)  under a shortfall section, a taxpayer is liable to pay additional tax because of a tax shortfall or part of a tax shortfall; and

 (b)  one or more of the following applies:

 (i)  …

   …

 (iii)  if the additional tax is payable under section 226G, 226H or 226J - the taxpayer was liable to pay additional tax under any of those sections in respect of an earlier year of income;

 (iv)  …

the taxpayer is liable to pay, by way of penalty, further additional tax equal to 20% of the amount of the additional tax.

 (c)  Where a taxpayer voluntarily discloses to the Commissioner a tax shortfall prior to the commencement of any audit action and the tax shortfall is in excess of $1000, s 226Z of the ITAA 1936 applies so as to reduce the penalty by 80%. That section reads as follows:

   

226Z If:

 (a)  under a shortfall section, a taxpayer is liable to pay additional tax in respect of a year of income because of a tax shortfall or part of a tax shortfall; and

 (b)  before the Commissioner had informed the taxpayer that a tax audit relating to the taxpayer in respect of the year was to be carried out, the taxpayer voluntarily told the Commissioner, in writing, about the shortfall or part;

 

the amount of the additional tax because of the shortfall or part is reduced:

 (c)  if the shortfall or part is at least $1,000 - by 80%; or

 (d)  if the shortfall or part is less than $1,000 - to nil.

 (d)  Section 227(3) of the ITAA 1936 confers on the Commissioner a general discretion to remit the whole or any part of the additional tax payable by a person under Pt VII.

  5  

 (a)  Mr Sparks' return for the relevant year reflected taxable income of $23,713, while Mrs Sparks' return reflected taxable income of $30,604. An audit of Mr & Mrs Sparks subsequently established that interest earned by the applicants on funds deposited in an Advance Bank account in their joint names (the interest income) and which should have been reflected as taxable income was not included in their respective returns for the relevant year. That omission of assessable income resulted in amended assessments being issued for both of the applicants, and which had the effect that the taxable income of Mr Sparks was increased to $26,819, while that of Mrs Sparks was increased to $33,260. Furthermore, additional tax was assessed in respect of both Mr & Mrs Sparks; the culpability component in respect of the additional tax was imposed at a rate of 30% for Mr Sparks and 25% for Mrs Sparks.

 (b)  (1) There was no dispute as to the fact that there was a tax shortfall in respect of the relevant year.

 (2)  In addition to the additional tax culpability component, a tax shortfall interest component was levied by the respondent. Interest on the outstanding amounts was assessed at $123.34 in the case of Mr Sparks and $119.12 in the case of Mrs Sparks; as I informed Mr & Mrs Sparks during the course of the hearing, the calculation of interest payable by a taxpayer under s 170AA of the ITAA 1936 is deemed by s 170AA(13) of the ITAA 1936 not to be an assessment within any of the provisions of the ITAA 1936. The effect is that a taxpayer has no rights of objection, review or appeal to the AAT under Pt IVC of the Taxation Administration Act 1953 (Cth) in respect of the imposition or remission of interest under s 170AA; (a taxpayer may however seek judicial review of a decision to impose interest under the Administrative Decisions (Judicial Review) Act 1977 (Cth)).

 (3)  The issue then before the AAT falls within a relatively narrow compass and being the quantum of the culpability component of the additional tax imposed by the respondent. In respect of both Mr and Mrs Sparks, additional tax equal to 25% of the tax shortfall was imposed by way of penalty under s 226G of the ITAA 1936. The rate of penalty tax imposed on Mr Sparks was increased to 30% pursuant to s 226X of the ITAA 1936 and having regard to his previous failure to declare relevant income for the 1996 year.

  6  Mr Sparks gave evidence on his own behalf and also on behalf of Mrs Sparks. That evidence can conveniently be summarised in this cl 6 (and subsequent clauses in these Reasons) as follows:

 (a)  Mr Sparks is a production planner; he prepares production work for printing using techniques which might best be described as akin to clinical path analysis. During the relevant year, Mr and Mrs Sparks were the sole shareholders in and directors of P.S. Print Pty Ltd (the company); the company conducted a printing business whose services ranged from the printing of business cards to the publication of novels. Mr Sparks informed the AAT that his responsibilities in respect of the operation of the business extended to sales and marketing, deliveries and, naturally, print planning and printing. During the relevant year, Mrs Sparks also worked in the business as did their son, who worked on a part time basis because of his ongoing university commitments.

 (b)  In June or July 1996, the applicants sold their house in Sutherland for the sum of $263,000. Mr Sparks informed the AAT that after completion of the sale in September 1996, he and Mrs Sparks deposited $251,000 of the proceeds of the sale into an account at the Advance Bank in their joint names; (T1 at p 6 of the First and Second T Documents, which is a copy of the account history, indicates that in fact the money was deposited into the joint account on 12 October 1996 and in the amount of $251,091.45; nothing turns on this slight discrepancy).

 (c)  On 3 April 1997, Mr and Mrs Sparks withdrew $214,246.53 from the joint account and which amount constituted the funds, less prior withdrawals, remaining in that account. During the term of the account, a net sum of interest amounting to $5991.58 had accrued. That amount reflects 4 separate interest components (totalling $6923.05) less relevant state taxes (totalling $36.90) and less a term withdrawal interest adjustment ($894.57).

 (d)  In May 1997, Mr Sparks experienced severe chest pain and for which he sought an emergency consultation at Sutherland Hospital. Upon examination by the emergency staff he was admitted to the hospital and, very shortly thereafter, underwent coronary surgery. During the course of that surgery 6 blockages were located, 3 of which were considered particularly acute. Those 3 blockages were treated via the insertion of a "stent" which had the effect of re-opening the blocked valves. Mr Sparks recuperated in hospital for 5 days immediately following the surgery and was discharged on 19 May 1997; he returned to work, albeit with some difficulty, on 22 May 1997.

 (e)  (1) In July 1997 Mr Greg Small, who was the accountant to the applicants, died in the bridge tragedy at the Maccabi Games in Israel. There was some confusion in respect of the precise details of the accountancy firm in which Mr Small then and previously practised. At the time of his death he was a partner in Laidler & Associates and in which there were 5 partners and a number of qualified associates. As to when precisely Mr Small became a partner in Laidler & Associates was unclear. He had previously practiced under his own name (with associates) as Greg Small & Associates. There was possibly some prior relationship between Mr Small and the taxpayer and the other professionals who became part of Laidler & Associates.

 (2)  It is clear though that at all relevant times Mr Small was not an accountant working on his own. Subsequently Mr Darren Rosen, an associate of Mr Small and who was apparently promoted into partnership at or about this time, became primarily responsible for the affairs of the applicants. The applicants met with Mr Rosen in November 1997 and their returns for the relevant year were lodged in November 1997.

  7  Further as to Mr Sparks' evidence:

 (a)  It was squarely put to Mr Sparks that even allowing for his operation, the subsequent period of recuperation and the death of Mr Small, his failure to reflect the interest income as taxable income was surprising, having regard to the fact that the returns were uncomplicated, were due (apparently) some 4 months after Mr Small's death, and there were professionals available in the accounting firm for that purpose. Moreover, the interest income component, when calculated as a percentage of the aggregate taxable income of the applicants for the relevant year, constituted a significant proportion of their income for that year.

 (b)  Mr Sparks suggested by way of explanation that while he may have entrusted the relevant documentation in respect of the interest income to Mr Rosen, he was not certain that he had in fact done so. He believed that there was a possibility that the Advance Bank interest was omitted in consequence of the documents referable to the Advance Bank being mislaid by the accounting firm but that he was not able to state precisely that this was so. (It is perhaps relevant to note that the returns did include another much smaller amount of interest derived from a different institution.)

 (c)  Mr Sparks indicated to the AAT that he and Mrs Sparks had met with Mr Rosen and had been given an opportunity to review the completed returns prior to their lodgment. Mr Sparks duly inspected and approved the returns. However, Mr Sparks was unable to explain why, even allowing for the fact that the Advance Bank interest documentation might have been mislaid, he had nonetheless failed to notice the absence of that interest income. As set out previously that interest income had formed a substantial part of their aggregate income for the relevant year. (Mrs Sparks, speaking from the Bar table, was unable to shed any further light on the situation.)

 (d)  Exhibit R1 is an amended assessment for Mr Sparks for the year ended June 1996. It indicates that Mr Sparks neglected to include in his return for that year interest income of $927 (although the actual amount payable to the respondent was only $278.90 as a result of credits due to Mr Sparks); that amended assessment also reveals that an understatement penalty and interest of $79.64 was imposed. Mr Sparks said in evidence that he did not recollect the amended assessment for the 1996 year. He suggested that it might not have reached him because Mr Small's firm had relocated premises in that year. But he was not prepared to allege, and did not in fact allege, that there was any omission on the part of his late accountant. And indeed there was no evidence before the AAT as to any culpability of any nature in or arising from the manner in which the accounting firm (whether before or after Mr Small's death) handled the affairs of the applicants.

 (e)  I think that the evidence of Mr Sparks before the AAT can be accepted. He did not seek to blame his accounting firm for the fact that there was a clear tax shortfall. He undoubtedly met with misfortune in the relevant year and thereafter. I refer here to his heart operation and Mr Small's death. But Mr Sparks is not an uneducated man; he was the main controller of the company and is not inexperienced in business affairs. The returns were simple and there was a significant period of time between Mr Small's death and the lodgment of the returns. In the result there was, when the returns were lodged, a clear and significant omission and for which there was not in reality any real or acceptable explanation.

  8  The evidence given by Mr Sparks encompasses, save only for the differences set out in this cl 8, the factual context also as it affects Mrs Sparks. Mrs Sparks' failure to declare the interest income component differed only in the following aspects:

 (a)  While Mrs Sparks attended the meeting with Mr Rosen at which the relevant year returns were finalised, it would seem that Mr Sparks was charged with the responsibility for ensuring that the returns were correct.

 (b)  There was no shortfall in respect of Mrs Sparks' 1996 return; it is for that reason that s 226X of the ITAA 1936 did not apply to her.

 (c)  (1) It appears that the respondent may initially have been unaware that there was an interest income shortfall in respect of Mrs Sparks' relevant year return. In evidence Mr Sparks suggested that it was only after they had notified an officer of the respondent that Mrs Sparks was a holder of the Advance Bank account and therefore subject to a similar increase in her taxable income, that she too was informed that such income was to be included on her return. It is relevant to note in this respect that Mr Sparks received an Income Discrepancy Schedule from the respondent on 24 February 1999 alleging that he had omitted $3106 of income from his relevant year return, while Mrs Sparks received a similarly named schedule on 29 March 1999 (approximately one month later) and which showed a shortfall of $2656; (see T5 at p 21 of the First and the Second T Documents). In the interim (after Mr Sparks had received his schedule and prior to Mrs Sparks receiving a schedule), a letter was mailed to the respondent; that letter was signed by both Mr and Mrs Sparks and was received by the respondent on 8 March 1999; it states (and see p 23 of the First and Second T Documents):

   

… Omitting to declare the interest was an oversight and we are pleased to pay the tax due on this amount. However due to the circumstances outlined above we respectfully ask that any penalties be waived.

 

Because the account was in both names the interest should be divided between Peter Roderick Sparks … & Beverley Jill Sparks … (emphasis added by the Tribunal).

 (2)  In a letter dated 28 September 1999 which was attached to Mr Sparks' application for review, he stated (at p 3 of the First T Documents):

   

It should be noted in my first explanatory letter to the ATO on 8 March 1999 that I brought to their attention our Advance Account … was in joint names and the interest should be divided equally. Once again I quote page 3 in the ATO Reason for Decision - Remission of Interest may be warranted in the following kinds of situations where - "I the taxpayer voluntarily advised the ATO of an underpayment and explained the particular circumstances." We subsequently received a series of forms for Beverley J Sparks relating to the omitted interest on this account. After checking the ATO figures and speaking with the bank regarding the amount of interest received I felt sure that all the interest had been placed in my name by the ATO and that no further payment from Beverley was necessary. I felt my payment covered all tax payable on all interest received. For this reason I continued to appeal to the ATO but made no payment of the amount requested for Beverley.

The impact of that letter (and including the extract quoted) is rather unclear. It may be that Mr Sparks was seeking to suggest that the Advance Bank interest (which was not disclosed) was derived jointly by Mr & Mrs Sparks and should be assessed against them equally. That the respondent was not unaware of the true position appears from the fact that the schedule in respect of Mr Sparks (referred to previously in these Reasons) related to an amount of approximately $3000 which in turn amounted to approximately half the interest income of roughly $6000. There was, of course, in relation to the Advance Bank interest a tax law (but not general law) partnership between Mr & Mrs Sparks.

 (d)  The AAT does not know why the schedules as referred to previously in these Reasons were sent to the applicants at different times, and so that the schedule for Mr Sparks preceded that for Mrs Sparks. It is quite likely given that the schedule for Mr Sparks referred to an amount of approximately $3000 that the respondent was then aware of the fact that there was a shortfall in respect of Mrs Sparks as well. Nevertheless, the letter received by the respondent on 8 March 1999 contained a disclosure by Mr & Mrs Sparks and that disclosure was made in point of time prior to the receipt by Mrs Sparks of a schedule referable to her. The applicants may have been motivated purely by a desire to ensure that they were taxed equally on the undisclosed interest. And indeed it would seem likely that such a disclosure was unnecessary in that the respondent appears to have been aware of the true position. It seems likely the audit in respect of the applicants was commenced prior to 8 March 1999, and certainly Mr Sparks received notice of it prior to that date. But Mrs Sparks received notice of it after that date. It seems to me that it may be open to Mrs Sparks to argue that her disclosure (8 March 1999) preceded the date on which she was notified that a tax audit related to her as well. The notice to Mr Sparks does not appear for this purpose to have been notice to her. And whatever her motives for the disclosure, the fact remains that it does appear to have been a disclosure. (I note in this context that I have had particular regard to Ruling TR 94/6 and in particular para 30, referred to more fully later in these Reasons.)

  9  It is convenient to gather together in this cl 9 relevant extracts from a number of decided cases:

 (a)  During her submissions, Ms Dao referred to a decision of the AAT in Case 34/95 95 ATC 324, AAT Case 10,211 (1995) 30 ATR 1342. In that decision, Senior Member Beddoe considered the meaning of "reasonable care" as it relates to s 226G of the ITAA 1936. In deciding not to remit the shortfall penalty of 25%, the Senior Member placed particular emphasis on the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 which introduced s 226G of the ITAA 1936. He noted at 324 as follows:

   

21. The explanatory memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992, the Bill which introduced section 226G to the Act, illuminates Parliament's intended meaning of the phrase "reasonable care". In that document, at page 80, it is explained that reasonable care "… requires a taxpayer to make a reasonable attempt to comply with the provisions of [the Act] and regulations. The effort required is one commensurate with all the taxpayer's circumstances, including the taxpayer's knowledge, education, experience and skill".

 

22. Given that the taxpayer's return was prepared by experienced tax agents, who objectively should have known, or at the very least, had the resources to find out, the requirements in respect of the deduction of superannuation contributions, and who furthermore prepared the returns for the particular employer involved, it is difficult to find that reasonable care has been exercised.

 

23. The superannuation contributions made by the taxpayer's employer would have been easily discoverable through simple enquiry. Further, considering the taxpayer's part-ownership of CI Pty Ltd, it is possible he, in fact, had knowledge of those contributions. I am, however, unable to make any such finding, as the taxpayer did not give evidence before me. Assuming that the tax agent's usual procedures were followed in the preparation of the applicant's return for the particular tax year in question, it would be reasonable to assume that the taxpayer would have confirmed the details of the return, and a prudent tax agent in the course of such discussion would have enquired as to the accuracy of the assumption that no employer-sponsored superannuation contributions were made during the year in question.

 (b)  Ms Dao also referred the AAT to a decision of Senior Member Pascoe in Arnett and Ors v FCT, Case 12,900 Re Arnett and FCT (1998) 39 ATR 1095; 98 ATC 2137. In that case, the taxpayer's tax agent had submitted the taxpayer's return along with an attachment to the effect that payments made by the taxpayer's former employer were bonafide redundancy payments and not lump sum payments referable to unused leave. The taxpayer argued that the attachment was in fact a request for an opinion in relation to the payment; this in turn, so the taxpayer argued, was evidence of reasonable care having been taken in relation to the lodgment of the return. The Senior Member was of the opinion that the taxpayer's agent had failed to take reasonable care, and made the following comments at ATR 1098-99; ATC 2140-41:

   

7. It was submitted for the respondent that the applicants or their tax agent had failed to take reasonable care. The respondent accepted that doubt on whether or not the applicants received a bona fide redundancy payment led to the use of the attachments but argued that they were statements not questions or requests for opinions, constituted a major change in description of income and did not indicate to the respondent that any further action was required. It was submitted that if real doubt had existed, the attachments should have been worded in a more equivocal way and requested consideration and advice. It was said that a higher degree of care is expected from a tax agent than an individual taxpayer with little experience or understanding of the law. It was not accepted that the letter from Coliban would lead a person with experience, skill and understanding of income tax law to assume that the total amount shown as Lump Sum A could qualify under section 27F which specifically includes, as a bona fide redundancy payment, only such amount of an eligible termination payment as exceeds the amount that could reasonably be expected to have been made as a consequence of voluntary retirement.

 

8. The additional tax imposed by way of penalty under section 226G of the Act applies where there is a failure to take reasonable care. "Reasonable care" is not defined but the explanatory memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992, which introduced the section into the Act, states that: "The effort required is one commensurate with all the taxpayer's circumstances, including the taxpayer's knowledge, education, experience and skill." In a decision of this Tribunal, reported as Case 34/95, 95 ATC 319, the Tribunal stated (at page 324):

   

Given that the taxpayer's return was prepared by experienced tax agents, who objectively should have known, or at the very least, had the resources to find out, the requirements in respect of the deduction of superannuation contributions … it is difficult to find that reasonable care has been exercised.

 

…

 

9. Mr Brass stated that it had been the intention of the tax agent to review all of the returns of former Coliban employees in October or November 1996 when the peak lodgment period had passed but that the commencement of the respondent's audit intervened. He said that the tax agent did not rely on the Coliban letter as demonstrating reasonable care but believed that the bringing to the respondent's attention that, maybe, there were problems with the group certificates and taking pains to highlight the matter did demonstrate reasonable care. He admitted that the expectation of bona fide redundancy payments was in error. As indicated I am firmly of the opinion that the tax agent did not suggest any problem or suggest any doubt in the requests for amendment or the attachments to the returns. The whole basis of self assessment is the acceptance by the respondent of statements made in returns lodged and requests for amendment. This, in turn, has led to the regime of penalties when such statements turn out to be incorrect.

 

10. In my view the tax agent clearly failed to take reasonable care to comply with the Act so as to attract the penalty imposed by section 226G. Equally, the same penalty could have been imposed under section 226K as the shortfall being caused by a statement that was not a reasonably arguable position. The statements made could even be seen as verging on recklessness of the tax agent so attracting the higher penalty of section 226H. I accept the practice was a busy practice and the tax agent took a short cut to deal with a possible issue, perhaps with the view of taking more time later to confirm the actual position. It is understood that the tax agent has met the cost of the penalties imposed and, unfortunately perhaps, must bear the result of a wrong decision to deal with the matter in the way in which it was done.

 (c)  In Pitcher v DCT, AAT Case 13,089; Re Pitcher and DCT (1998) 39 ATR 1203; 98 ATC 2190, I had occasion to consider whether a 25% shortfall penalty should be upheld. I commented (at ATR 1211-12; ATC 2197-98 and following):

   

… Clause 14(j) of Taxation Ruling TR 94/4 provides that a taxpayer who engages a registered tax agent is vicariously liable for the tax agent's careless errors, although clause 14(j) in its terms refers to a somewhat different situation, ie one where the taxpayer prepares his or her own return and seeks advice from a tax agent as to aspects of it. Clause 14(j) of the Ruling is set out in full as follows:

   

(j) a taxpayer who prepares his or her own tax return and seeks advice in respect of a specific matter in the tax return from a qualified accountant or lawyer or similar kind of adviser, and follows the advice provided, would ordinarily be accepted as having exercised reasonable care in respect of the matter on which the advice was sought. However, if the adviser is a registered tax agent, whether or not the adviser is also a qualified accountant or lawyer, the new penalties continue to apply on the basis that the taxpayer is vicariously liable for the tax agent's careless errors if the taxpayer has consulted the accountant or lawyer in his or her capacity as a registered tax agent (ie in respect of the preparation of a tax return). The taxpayer's remedy against his or her tax agent is under section 251M of the ITAA 1936, which provides that a taxpayer may recover from a registered tax agent any additional tax or interest which the taxpayer has become liable to pay through the negligence of the tax agent.

 

(b) In Re Carlaw and FCT 95 ATC 2166 Deputy President B J McMahon said in clauses 23 and 24 of his decision:

   

23. I now turn to the question of penalty tax. Section 226G provides that if a taxpayer has a tax shortfall for a year and the shortfall, or part of it, was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with the Act or the regulations, then the taxpayer is liable to pay by way of penalty to additional tax equal to 25 per cent of the amount of the shortfall or part. To indicate the Commissioner's understanding of the meaning of failure to take reasonable care, Taxation Ruling TR 94/4 was promulgated. Paragraph 6 of that ruling is in these terms:

   

the reasonable care test requires a taxpayer to take the care that a reasonable ordinary person would take in all the circumstances of the taxpayer to fulfil the taxpayer's tax obligations. Provided that a taxpayer may be judged to have tried his or her best to lodge a correct return, having regard to the taxpayer's experience, education, skill and other relevant circumstances, the taxpayer will not be liable to pay penalty.

 

24. The taxpayer is a truck driver. He made claims for deductions pursuant to advice he received from a qualified tax agent, who had been engaged by his union. If a man in that position is advised that he may make a claim, can it be said that he fails to take reasonable care to comply with the Act if the claim is unsuccessful? I think not. Clearly the mere fact that a claim is made cannot thereby render the conduct of a taxpayer careless, particularly when that claim is reasonably arguable.

 

(c) Clause 27 of that decision then goes on to state that the professional advice taken by Mr Carlaw had some measure of support:

   

… from Case U148, from the article of Mr Durack which I have quoted, and from observations made in Edwards and in the RTA case.

 

(d) In this case I accept that the applicant sought advice from a qualified tax agent. However, the advice given by the tax agent in relation to the vehicle deduction was erroneous and in fact enjoyed no relevant measure of support. A proper reading of the relevant cases would have shown that, in respect of the vehicle expenses, the applicant had little or no prospect of success, and that claim was persevered with even after the respondent had furnished case authorities in support of his decision to disallow the claimed deduction; the claim, though not a reckless one, was not reasonably arguable.

 

In all the circumstances, I consider that some penalty is appropriate; however, I also consider, having regard to the fact that the applicant is patently honest, and that the claim for the vehicle expenses arose entirely from mistaken advice by the tax agent, that a penalty at the rate of 25% is excessive.

It is significant in my view that the additional tax in Pitcher's case was partially remitted due to erroneous advice having been provided by the tax agent to the taxpayer. Moreover, the taxpayer in Pitcher's case had, at least to some degree, a reasonably arguable position in respect of certain claims. The factual context in Pitcher's case is distinguishable from the facts in the proceedings now before me. In the present case, Mr and Mrs Sparks did not receive inappropriate or incorrect advice from their accountant; in fact, Mr Sparks simply failed to inform his accountant of the existence of the interest income and in consequence of which, that income was not included in the relevant year returns. Nor can it be said that Mr and Mrs Sparks had a reasonably arguable position in respect of the shortfall. As was noted above, there was no dispute that the interest income had been omitted from the relevant year returns. (I note in any event and on reflection that I may have been generous to the applicant in Pitcher's case.)

 (d)  I do not think it necessary to refer in any detail to any other cases decided in the AAT. I note however that in AAT Case 12,035 (1997) 36 ATR 1140; Case 11/97; 97 ATC 173, I remitted the additional tax penalty on the basis that the law there relevant was somewhat unclear, even allowing for the fact that the taxpayer had a degree of familiarity with the specific principles of law relevant in that case.

  10  

 (a)  Paragraphs 14(j) and 14(k) of Ruling TR 94/4 (a binding public ruling) are apposite for the purposes of these Reasons. Paragraph 14(k) is in the following terms (para 14(j) having been cited in the extract from Pitcher's case above):

   

(k) a taxpayer does not satisfy his or her obligation to take reasonable care simply by using the services of a tax agent or other tax adviser. It would remain the taxpayer's responsibility, for example, to properly record matters relating to his or her tax affairs during the year, and to draw all the relevant facts to the attention of the agent or adviser, in order to satisfy the reasonable care test. In addition, a taxpayer would be expected to honestly answer any questions asked by the agent in respect of the preparation of the tax return … (emphasis added by the Tribunal)

 (b)  In addition Ruling TR 94/4 sets out examples of some situations which would indicate a failure to take "reasonable care"; these examples include where an explanation for omitting assessable income was that the taxpayer "forgot", or failed to maintain adequate records of income and expenditure.

 (c)  Ruling TR 94/6 outlines the respondent's policy on voluntary disclosures for the purposes of administering penalties in respect of tax shortfalls. The ruling amplifies the 4 criteria required to be satisfied pursuant to section 226Z of the ITAA 1936 for a reduction in a shortfall penalty imposed as follows:

   

(i) Time at which taxpayer is informed of a tax audit

 

22. Generally, a taxpayer will be treated as having been informed that a tax audit relating to the taxpayer for a particular year is to be carried out when the ATO first makes contact with the taxpayer or his or her representative about the audit. Notification will normally be made in writing or may be made orally. The use of the word "audit" is not essential. …

 

23. …

 

24. To prevent harsh results arising because of the broad definition of a tax audit, the discretion available to the Commissioner under section 226ZA to treat a disclosure as having been made before the taxpayer was informed of a tax audit should generally be exercised in cases where, the tax shortfall disclosed was unlikely to fall within the focus of the audit notified to the taxpayer. …

 

25. …

 

(ii) Full and true disclosure

 

26. The requirement that the disclosure be in writing is self explanatory. In terms of the extent of the disclosure required, if the disclosure is incomplete, but the degree of incompleteness is insignificant and has no or little material effect on the processing of the disclosure, the case may still be treated as a disclosure which qualifies for the reduced rates of penalty.

 

27. A taxpayer may disclose one part of a tax shortfall, but not other parts of the tax shortfall. This may be because the taxpayer is only aware of one part of the shortfall. Provided the disclosure on the particular part of the shortfall is full and true, the taxpayer is entitled to the benefit of the reduced penalty rates in respect of the part of the shortfall disclosed. The part or parts of the shortfall not disclosed would continue, if appropriate, to attract penalty at the normal (non-reduced) rates. On the other hand, if a taxpayer's disclosure in respect of a part of a tax shortfall is not sufficiently complete then the disclosure will not qualify for a reduction in penalty.

 

28. A taxpayer need not admit liability in respect of the shortfall disclosed. A taxpayer is eligible for the reduced penalty rates whether or not the taxpayer maintains an opinion contrary to that of the Commissioner, or disputes the adjustment the Commissioner makes to the taxpayer's assessment.

 

(iii) Voluntary

 

29. The term "voluntary" is not defined in the legislation. Its normal meaning implies an act done without prompting, persuasion or compulsion. A disclosure will be treated as having been made voluntarily if it is made without having been prompted by ATO action. That is, the disclosure generally must be made before the ATO first makes contact with the taxpayer or his or her representative where that contact may have indicated to the taxpayer that his or her affairs are being audited.

 

30. Contact with the taxpayer will normally be by letter or telephone advising the taxpayer of the commencement of an audit, including a letter advising a taxpayer of information that suggests a tax shortfall. The meaning of "contact with the taxpayer" may vary between cases but normally the term should be read narrowly to ensure that most taxpayers will get the maximum benefit from the reduced penalties for disclosures.

 

31. Under normal circumstances, a disclosure may be treated as having been made before any contact with the taxpayer even though enquiries by the ATO have commenced and the taxpayer could reasonably expect to be subject to an audit. …

 

32. …

 

…

 

(iv) Threshold

 

37. Where the amount of a tax shortfall or a part of a tax shortfall voluntarily disclosed before the taxpayer is informed of a tax audit is equal to or greater than $1,000, the penalty otherwise payable in respect of that shortfall or part is reduced by 80%. … (emphasis added by the Tribunal)

  11  

 (a)  In relation to the additional tax penalty imposed on Mr Sparks pursuant to s 226G of the ITAA 1936 the AAT considers, in line with the decisions in Arnett and AAT Case 10,211; Case 34/95, that this is a case where the circumstances do not warrant a remission of the penalty. Mr Sparks acknowledged that he had probably failed to furnish his accountant with the relevant details in relation to the interest income and in any event he accepted responsibility for that omission. Mr Sparks was also unable to explain why, when reviewing the returns prior to lodgment, he had failed to alert his accountant to the absence of the interest income component; Mr & Mrs Sparks' tax affairs were simple and (as set out previously) the interest income omitted formed a substantial, and one would imagine memorable, part of their income for the relevant year. While Mr Sparks' operation and the death of his accountant would certainly have resulted in some disruption to his affairs, both events occurred a number of months prior to his obligations in respect of his relevant year return. Moreover, the simplicity of the relevant year returns and the size of the accountancy firm with which he chose to remain after the death of Mr Small did not allow for the use of these factors as a viable explanation for the omission of the interest income component. In respect of the penalty imposed under s 226X of the ITAA 1936 I am of the opinion that that too cannot be disturbed. The applicant failed to return income for a prior tax year and which event correctly attracts an additional tax penalty under the terms of s 226X. Mr Sparks' assertion that he was unaware of an additional tax penalty having been imposed for the 1996 year of income does not alter the fact that there was a shortfall on his 1996 return and for which an additional tax penalty was imposed. In summary then, the circumstances of Mr Sparks' case do not warrant any remission of the additional tax penalty imposed under either s 226G or s 226X of the ITAA 1936.

 (b)  In relation to the additional tax penalty imposed on Mrs Sparks, I am of the opinion (not without some reservation) that she is entitled to a reduction of the culpability component of the additional tax from 25% to 5%. Section 226Z of the ITAA 1936 indicates that where a tax shortfall is voluntarily disclosed to the Commissioner in writing and prior to the commencement of an audit of that taxpayer, the additional tax penalty is to be reduced by 80% (where the shortfall is greater than $1000). The CCH Federal Tax Reporter (and see para 766-930) indicates that even where some other taxpayer (and including an associate) has been notified of a tax audit, that may not be notice to the applicant. This being so Mrs Sparks is entitled to the benefit of s 226Z of the ITAA 1936 precisely because she made a voluntary disclosure before she herself received notice of an audit against her. Her motivation for the disclosure may have been ambiguous, she may have been motivated by a desire to ensure that the correct amount was assessed to her. It may also be that she took into account that the tax audit against Mr Sparks would inevitably extend to her. But put in colloquial terms she managed to "get in first" and made a disclosure before she herself received formal notice. Ruling TR 94/6 indicates that taxpayers who make disclosure should be treated generously, and with its content in mind, I have decided that she should obtain the benefit of s 226Z of the ITAA 1936. It is for this reason that her culpability component has been reduced to 5%. The circumstances are such that she should regard herself as fortunate.

  12  

 (a)  The objection decision in respect of Mr Sparks (NS1999/91) is affirmed;

 (b)  The objection decision in respect of Mrs Sparks (NS1999/98) is affirmed save only that the culpability component of the additional tax is reduced from 25% to 5%; the interest component is not affected.