Case V14

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 15 January 1988.

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P.M. Roach (Senior Member)

In his income tax return for the year ended 30 June 1983 the applicant, a 31-year-old married man and school teacher, claimed a dependant's rebate for his wife who had been dependent on him from February 1983 when she ceased work to prepare for the birth of their first child (born in May 1983). In all he claimed rebates of $971. His return was assessed without amendment on 30 August 1983. Nearly two years later, following investigations by the staff of the Commissioner, he received a notice of amended assessment dated 3 June 1985 attended by an adjustment sheet which only showed that there had been no change to taxable income as previously assessed. If any other explanation for the amended assessment was given, it was not presented in evidence. What could be discovered by comparing the terms of the amended assessment with the original was that Item G (rebates and other credits allowed against tax assessed) had been reduced from $999.93 to $538.52: a reduction of $461.41; and that ``additional tax for incorrect return'' (Item D) amounting to $267.33 had been imposed.

2. Initially the applicant objected to the levying of further amounts as tax and additional tax. In his objection he said (inter alia):

``The Taxpayer strenuously objects to: (1) the re-assessment of his income tax return for the year ended 1983; (2) the impost of additional income tax; (3) the impost of penalty taxation; (4) your claim that an incomplete or false income tax return was submitted; (5) your claim that the Taxpayer failed to declare all income for the year ended June 1983 in relation to Spouse's Separate Net Income.''

He claimed that all of the information he had provided was accurate; that all information had been provided in accordance with the official instructions of the Commissioner as to the completion of forms of return; and that if any error was made prior to the original assessment, it was made by officers of the Commissioner. Later he accepted that the Commissioner was entitled to issue an amended assessment and to increase his liability in tax. Accordingly, it is not necessary to analyse the involved drafting of the relevant provisions of the Act. However, it is appropriate to observe that the two relevant sections (sec. 159H and 159J) embrace nearly three pages of text.

3. On 24 September 1985 the Commissioner issued two notices to the applicant. The first was a standard form letter advising him that his objection had been considered and disallowed and advising the applicant as to his rights to independent review. A second letter ventured some information as to the need there had been for the applicant to bring to account all income earned by his wife during the tax year in question, but did not embark upon an explanation as to why that should be so. As to the matter of additional tax, the letter said:

``Your attention is drawn to subsec. 226(2) of the Income Tax Assessment Act which imposes additional tax and the fact that this provision automatically comes into effect as soon as a taxpayer omits income from, or overclaims deductions or rebates in any return. The extent of the additional tax which may be imposed, calculated as an amount equal to double the difference between the tax properly payable and the tax originally assessed, is considered to be an indication of the seriousness with which Parliament regards the lodgment of incorrect returns.

The purpose of the additional tax imposed by subsec. 226(2) is to ensure the accuracy of returns on which the whole income tax system is based. It is clear from the wording

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of that provision that the additional tax is not intended to be applied only in the case of fraud or other deliberate evasion, but also where the evasion is a result of factors such as carelessness ignorance of the law, etc.

However, subsec. 226(3) authorises the Commissioner to remit this additional charge, either wholly or in part where the circumstances are considered to warrant that course.

At the time of amendment, the circumstances of your case were taken into account and a very substantial remission of additional tax was granted. Further remission of the additional tax is not proposed and accordingly, the objection lodged against the amended assessment for the year ended 30 June 1983 has been disallowed.''

What circumstances had been taken into account were not specified.

4. To that point of time the applicant did not know the identity of the person or persons who had determined upon the ``penalty'' to be exacted of him or who had (so it was said) taken into account the circumstances of his case at the time of amendment. Nor did he know that the amount of penalty had been set by officers of the Commissioner in the belief that they were acting in compliance with the norms set forth for the direction of the staff of the Commissioner in his Taxation Ruling IT 2012 (25 January 1983). Nor was he advised that by those standards, as to $123.73, the penalty represented compensatory interest calculated at the rate of 20% per annum from date of refund of tax upon the original assessment to a date shortly before the issue of the amended assessment: a sum intended to merely compensate the revenue for the loss to it of funds during that period. Nor was he told that, as to $143.60, the penalty represented 40% of tax avoided imposed as a ``culpability factor'' that being the rate of culpability factor commonly understood to be proposed by the Ruling for ``first offenders'', in the absence of exceptional circumstances.

5. Whether a fuller disclosure of the action of the Commissioner to that date would have mitigated or removed the sense of injustice suffered by the applicant is not known. It would not have been surprising if his sense of being unjustly treated had been confirmed, particularly if he had found out that the same rates for calculating penalty had been used as are commonly applied to persons who have repeatedly avoided their tax liabilities over many years by deliberately understating their incomes. However, what is clear is that such information as was provided did not remove that sense of injustice.

6. The applicant requested that the matter be referred to a Taxation Board of Review for review. In doing so, saying (inter alia):

``The logical implication of your statements is that you consider me to be a lier [sic], fraudulent and deceitful. The Taxpayer totally rejects such imputations and disguised assertions about his character... If the wording of your instructions hadn't been what it was the Taxpayer wouldn't have followed it. Hence any errors are the responsibility of the Australian Taxation Office.''

The request for reference was in due course referred for independent review before this Tribunal.

7. On 27 July 1987 at a Preliminary Conference held before a member of this Tribunal, the applicant was made aware, seemingly for the first time, of the principles which had been applied in the assessment of penalty by the Commissioner.

8. If the applicant had been told at that time that he would have had to pay a fee such as would be required today of $240 (S.R. 181 of 1987) as a prerequisite to challenging the substantially unexplained imposition of a penalty of $267.33 imposed by persons unknown, he might well have felt an even keener sense of injustice. If he had ever had the experience of receiving notice of an ``on-the-spot'' traffic fine for $50 or $100, he would at least have been able to identify the officer making the demand; to deny the offence, or alternatively, seek to explain or mitigate before the demand was made; and, if that failed, he would have been able to resist that demand and have an independent determination as to it without being required to make any further contribution to the public revenues.

9. The error giving rise to the underpayment of tax arose in the course of the completion of an income tax return on a form provided - for

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the use of taxpayers and the convenience of the Commissioner - by the Commissioner. It did not arise by concealing a known source of income. It did not arise by understating receipts from a known source of income. It did not arise by overstating expenses which had been incurred in the course of deriving the assessable income. Nor did it relate to tax factors which are widely known and understood as being consistently in force over long terms of years. Nor did it relate to a matter which had recurred or was likely to recur year by year. Instead it related to a matter of allowances for dependants: a field in which legislative provision changes frequently, and is almost invariably the subject of complex provisions within the Income Tax Assessment Act 1936 (``the Act'').

10. The year in relation to which the claim was made was that ended on 30 June 1983. That was a year in which those taxpayers who claimed it could be entitled to a rebate of up to $963 if they had a dependent wife and dependent child at 30 June. (An indication of the extent of legislative change in this area is that in the following year the requirement that the dependent spouse should be a spouse was abolished. Some persons over-claimed the rebate by reason of ``anticipating'' the legislative change and in some cases at least no additional tax was levied - cf. Case R64,
84 ATC 465.) For this taxpayer, as for most others of his class and station, knowledge of any entitlement and of the duties of taxpayers in claiming it had to be obtained by a consideration of the form of income tax return and of the terms of the instruction booklet published by the Commissioner for the guidance of taxpayers. The same result could have been achieved by consulting an adequately qualified taxation agent whose information might have been gleaned from the same sources, or from more detailed study of the provisions of the Act and of the published opinions of the Commissioner and other commentators. However, taxpayers have no legal obligation to incur expense in that regard and it is not to be held to the detriment of the taxpayer that he failed to incur expense in obtaining such services. Nor did he buy or borrow a copy of the Income Tax Assessment Act (1983 edition) with a view to ascertaining his obligations. Had he done so it is most unlikely that a perusal of its provisions would have clarified matters for him. Nor did he go to the Commissioner to ask whether his understanding of what appeared in the Commissioner's publications was correct. That was not unreasonable, particularly as he was not in doubt as to what was required of him. Further, had he done so he might have been incorrectly advised and, if the advice given him had worked to his detriment, he would not have been entitled to any remedy (cf. Case T85,
86 ATC 1118).

11. The applicant and his wife had been married for some years and both had been employed. With their first child due to be born in May 1983, the applicant's wife continued at her duties as an infants' teacher until the close of the 1982 school year. Her income as a teacher continued throughout the summer holidays following, but her entitlement to remuneration ceased when her resignation from the service of the Education Department took effect prior to the commencement of the 1983 school year. From that point forward the couple were to provide for themselves, and in due course their child, as a ``one-income'' family. The result was that, whereas up to 2 February 1983 they had pooled their income and resources, from 2 February 1983 the husband's income alone was used to provide for the family. The applicant's wife was still entitled to some income from moneys she had invested, but those earnings were not used for the support of the family. It has been accepted that from that date his wife was a ``dependant'' in the relevant sense.

12. When he came to complete his income tax return to 30 June 1983 he used Form A and Schedule A prepared for use with that form - both as issued by the Commissioner. On the face-sheet of Form A he gave the full names of his wife as required. By not nominating a date of marriage since last return, he indicated that his marriage had preceded that return and, therefore, as a matter of probability, that he had married before February 1983. When he came to complete the relevant items in Schedule A, he found that the material portions of the printed text were as follows:

``DEPENDANTS

• ^* Reduced the rebate otherwise allowable by $1 for every $4 by which the separate net income of a dependant exceeds $282. Separate net income is explained in `The 1983 Forms A and B Instructions'.

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• ^*An example of a rebate calculation for a dependant who derived income during part only of the year is shown in the 1983 Instructions.
• ^*A proportionate rebate must be claimed where two or more persons contribute to the maintenance of a dependant.

A2 DEPENDENT CHILD

• Name:
• Place of residence:
• Period a dependant:
• Separate net income:
• Date of birth:

A3 SPOUSE

• Name:
• Place of residence:
• Period a dependant:
• Separate net income:''

13. Before completing that aspect of the return he had regard to the publication of the Commissioner entitled ``The 1983 Forms A and B Instructions''. The face-sheet of the booklet said (inter alia):

• "These instructions have been prepared to assist persons completing income tax return forms."; and
• ``If any doubt arises regarding any item of income or expenditure, the full facts should be enclosed with your return.''

It did not at that point refer to rebates. However, the section headed ``REBATES'' provided (inter alia):

``DEPENDANTS

Maximum Rebate Claim - The maximum rebate specified at Items A3 to A5 on Schedule A is allowable if, for the whole of the year, you were:

• (a) a resident of Australia; and
• (b) the sole contributor to the maintenance of the dependant (see notes on `Maintenance of Dependants')

and the dependant in respect of whom the rebate is claimed:

• (a) was a resident of Australia for the whole of the year; and
• (b) did not have a separate net income of more than $285 for the year (see notes on `Separate Net Income').

Part Rebate Claim - A proportionate rebate should be claimed where:

• (a) more than one person contributed to the maintenance of the dependant (see notes on `Maintenance of Dependants'); or
• (b) the dependant commenced or ceased to be a dependant during the year; or
• (c) the dependant was a resident for part only of the year (but see notes on `Overseas Dependants').

Maintenance of Dependants - You are regarded as having contributed to a dependant's maintenance if you provided food, lodging or clothing for the dependant or made payments for the dependant's living, medical or education expenses and also where you and the dependant resided together, even where the dependant had a separate net income.

NOTE: A spouse rebate is not allowable in respect of a divorced or de facto wife or husband.

Separate Net Income - Where a dependant derived a separate net income in excess of $285 during the period maintained by you, the maximum or part rebate otherwise allowable must be reduced. The reduction is $1 for every $4 by which the dependant's separate net income exceeds $282.''

14. That text was followed by a passage describing the meaning of ``separate net income'' which identified some of the receipts to be brought to account and others to be excluded from account. It gave no indication as to the period over which separate net income was to be measured. The text then continued:

``An example of how a rebate is affected by separate net income is as follows:

A husband contributed to his wife's maintenance for the whole year and she had a separate net income of $2,283 during six months of the year. There was no dependent child or student. His rebate is calculated as follows:

      Maximum rebate                                 $830
        Separate net income of wife         $2,283
        Less separate net income
          threshold                            282
                                            ------
        Excess of separate net
          income, over $282


                 $2,001

      Rebate is reduced by $1 for every
      $4 of separate net income in
      excess of $282
      That is,
          $2,001/4 = $500 (cents are ignored)
      Rebate is reduced by                         $500
                                                   ----
      Rebate allowable to this husband             $330
              

If this husband had also maintained a dependent child or student during the year the rebate allowable would be $463 (that is $963 - $500 = $463).

The maximum rebate for a full year dependant is allowable where the dependant's separate net income does not exceed $285. The reduction in the rebate otherwise allowable, by $1 for every $4 by which separate net income exceeds $282, means that no rebate is allowable when separate net income is equal to or greater than the following amounts:

Spouse, daughter-housekeeper-

      (a) where `with dependant'
          maximum applies          $4,134
      (b) otherwise                $3,602''
              

15. The applicant considered the foregoing information and proceeded to complete the form. He particularly noted the passage under the heading ``Separate Net Income'' which referred to reductions in the rebate when separate net income of the spouse exceeded $285 ``during the period maintained by you''.

In relation to his son he noted 7/5/83 as his date of birth; stated that the period of the son's dependency had been ``since 7/5/83 54/365''; and that he had no separate net income (``Nil''). In a marginal note on his draft he did a calculation 54 ÷ 365 x $133 (the difference between the maximum rebate with dependant $963 and maximum rebate without dependant $830) to fix a figure of $19.68.

In relation to his spouse he identified her period of dependency as ``since 2/2/83 149/365'' and showed her separate net income at ``$60.62''. By a calculation in the margin 149 ÷ 365 x $830 = $338.82 he determined on the amount to be claimed.

Aggregating the claims for spouse and son at $358.50, he claimed a rebate of $359.

16. I am satisfied that he made an honest mistake occasioned by the circumstance that the instructions failed - not surprisingly - to make it clear that in his circumstances it was the separate net income of his ``dependant'' for the entire fiscal year which needed to be specified. To state her income derived during the period of dependency was not enough. Why that should have been so may be clear to those whose special interest in life is income tax, or income tax rebates, but I am satisfied that there was nothing before this taxpayer which ought to have made him suspect the soundness of the view he had formed.

17. There can be no doubt that underpayment of tax is a serious matter but it is far from being the most extreme form of anti-social conduct. In Case U36
87 ATC 266) I considered many aspects of the errors - deliberate and inadvertent - which led to an underpayment of tax and of the consequences which should flow when an error of, or made on behalf of, a taxpayer which occasions the underpayment of tax and consequent advantage to the taxpayer. Nor can there be any doubt but that the operation of sec. 226 of the Act (as it was) was not limited to circumstances in which the taxpayer had deliberately acted with a view to gaining an advantage for himself. Mere carelessness or inadvertence would suffice to found liability to additional tax.

18. But having said that, it remains true that the imposition of additional tax is a penalty (cf.
F.C. of T. v. Trautwein (1936) 56 C.L.R. 196 and 211) and that implies that there must be some act or omission of a taxpayer or of those acting on his behalf which will warrant the penalty imposed. As Evatt J. said in that remarkable case (p. 209):

``belief that they [betting winnings] at least were no part of his assessable income''

and the fact

``that the omission of betting gains was due to the taxpayer's misunderstanding of a provisional departmental ruling''

were relevant to the determination of penalty.

In my view, any error in coming to an understanding of the rebate provisions is much more readily understandable and excusable.

19. It is quite clear in the circumstances of this case that the only matter to be criticised in the applicant is that he erred in failing to

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comply with the requirements of a legislative schema expressed with technical precision in words chosen by specialist parliamentary draftsmen but not in words so clearly expressed as to be readily comprehensible; and that his failure to do so came notwithstanding his efforts to comply with those requirements by his attempts to comprehend fully and precisely all that was explicit and implicit in the instructions for the guidance of taxpayers published by the Commissioner. His error was quite understandable.

20. For that ``offence'' he has been punished as if he had deliberately and repeatedly lied in understating his income and had done so with the object of avoiding his obligations as a taxpayer. That any penalty should have been imposed with a 40% culpability factor is grossly unreasonable. It reflects a mechanistic approach to the exercise of discretion which finds little justification in the Commissioner's published Rulings.

21. What is of greater concern is that that mechanistic approach would seem to have occurred not only at the point of assessment but also upon the internal ``review'' of the exercise of discretion when made following objection it was said (inter alia) that:

• ``At the time of amendment,'' - that is, before the applicant had had any opportunity to explain himself - ``the circumstances of your case were taken into account and a very substantial remission for additional tax was granted.''

What is more, the hearing proceeded on the basis that the Commissioner contended for affirmation of the penalty imposed. (It was said that an offer to reduce additional tax was made in an endeavour to persuade the applicant to withdraw, but it was not accepted. That hardly reflects any recognition that the penalty was excessive.)

22. At the very least, such a statement is inaccurate and ``misleading''. If the circumstances of the case of the applicant were taken into account at all - which I very much doubt - the result was to so exercise discretion as to treat his conduct as being as much deserving of penalty as that of many a deliberate and persistent tax evader. I am quite satisfied that there was no basis at all for the imposition of such a culpability factor. Indeed, in the circumstances of this case, the question which has most concerned me is whether additional tax should be levied at all.

23. However, even if no ``culpability factor'' was appropriate, a further question is whether additional tax should be levied to the extent of the ``composition'' factor or at least some part thereof. As was said in Case U36 (ante), an interest rate of 20% per annum - related to the period 1983 and 1984 - was a high rate of interest: sufficient to be itself a commercial deterrent, all the more so when the interest burden is deductible for purposes of income taxation. On the other hand, it must be acknowledged - and it is not disputed by the applicant - that by reason of his error he had the use for a period of moneys which should have been available to be used by the Revenue.

24. But, questions as to rates of compensation and of culpability factors only arise if there is something in the conduct of the applicant, or of those for whose actions he is accountable, which calls for the imposition of some penalty. The Parliament has determined that a penalty of 200% of tax avoided shall be imposed, but only if the Commissioner so decides after carrying out his duty to consider remitting penalty with a view to assessing penalty at a figure which in all the circumstances is reasonable. That exercise of discretion may result in a complete remission.

25. In the circumstances of this case I consider that additional tax should be wholly remitted. The order of the Tribunal will be that the determination of the Commissioner upon the objection under review be varied accordingly.