CASE 10/2005

Members:
R Hunt SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2005] AATA 696

Decision date: 21 July 2005

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R Hunt (Senior Member)

Summary

1. The Applicant company was carrying on an unsuccessful business over a period during which it furnished Business Activity Statements (BAS) and claimed Goods and Services Tax (GST) credits. The Tribunal has found that the Applicant made false statements in the 14 returns in question and thereby obtained GST credits to which it was not entitled. These erroneous returns resulted in a tax shortfall amount. The Tribunal has upheld the Commissioner's decision on the Applicant's objection that the resulting penalty imposed under Division 284 of Schedule 1 of the Taxation Administration Act 1953 is appropriate.

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ATC 198

Background

2. The objection decision, which is under review in this matter, is the Respondent's disallowance, dated 21 September 2004, of the Applicant's objection, dated 5 July 2004. The Applicant company objected to an assessment of a penalty in respect to BAS returns for GST, dated 14 May 2004. The Commissioner's decision disallowed the remission of the penalty imposed in relation to a shortfall amount, calculated on the base penalty of 75%. The penalty was assessed at 75% because the Commissioner found the Applicant had displayed an intentional disregard to a taxation law when overstating tax credits payable to it.

3. The sole director and shareholder of the Applicant company represented the Applicant before the Tribunal and gave sworn oral evidence. The Tribunal had before it the T documents produced by the Commissioner. These included copies of the Applicant's BAS returns in question, from the inception of the imposition of GST and throughout the period covered by the objection decision.

Legislative scheme for GST returns

4. Section 31-5 of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) requires an entity that has been registered under the GST Act to give GST returns in the approved form to the Commissioner. That form is called the Business Activity Statement (BAS) and is designed to record an entity's GST liabilities and credits for a specified period.

5. An entity is required to include in the BAS the total amount of GST it collected for the period and the total amount of GST credit available to it in its business. If the GST credit is more than the GST payable, the entity is entitled to a refund from the Commissioner (pursuant to section 35-5 of the GST Act). If the GST payable is more than the GST credit, then the entity must pay the difference to the Commissioner within a specified time (pursuant to section 33-3 of the GST Act).

Evidence before the Tribunal

6. The documents before the Tribunal show that the Applicant lodged a total of 14 BAS returns for the period 1 July 2000 to 31 December 2003, providing details of its sales and acquisitions and claiming input tax credits for GST available to it in the course of its enterprise. It claimed an ongoing business of providing graphic design and advertising services (T3-15 to T16-42).The director of the Applicant company (the director) gave evidence that this had been the business of the company since the 1980s and that it continued with this business at the date of the hearing.

7. Following is a table summarising the information supplied in the Applicant's BAS returns. The table was supplied by the representative for the Commissioner for the hearing. The director has not disputed the accuracy of this summary.

+-----------------------------------------------------------------------+
|   Period   |  Total  |    GST    |     Total      |   GST    | Refund |
| (Quarters) | Sales $ | payable $ | Acquisitions $ | Credit $ | Due $  |
|-----------------------------------------------------------------------|
|   Sep 2000 |   1,289 |       117 |          3,874 |      352 |    235 |
|-----------------------------------------------------------------------|
|   Dec 2000 | 147,675 |    13,425 |        170,445 |   15,495 |  2,070 |
|-----------------------------------------------------------------------|
|   Mar 2001 | 146,386 |    13,308 |        166,571 |   15,143 |  1,835 |
|-----------------------------------------------------------------------|
|   Jun 2001 |  73,840 |     6,713 |         85,217 |    7,747 |  1,034 |
|-----------------------------------------------------------------------|
|   Sep 2001 |  49,962 |     4,542 |         68,178 |    6,198 |  1,656 |
|-----------------------------------------------------------------------|
|   Dec 2001 |  48,950 |     4,450 |         81,814 |    7,438 |  2,988 |
|-----------------------------------------------------------------------|
|   Mar 2002 |  24,475 |     2,225 |         40,909 |    3,719 |  1,494 |
|-----------------------------------------------------------------------|
|   Jun 2002 |  36,718 |     3,338 |         61,369 |    5,579 |  2,241 |
|-----------------------------------------------------------------------|
|   Sep 2002 |  43,714 |     3,974 |         59,653 |    5,423 |  1,449 |
|-----------------------------------------------------------------------|
|   Dec 2002 |  41,602 |     3,782 |         69,542 |    6,322 |  2,540 |
|-----------------------------------------------------------------------|
|   Mar 2003 |  21,417 |     1,947 |         35,794 |    3,254 |  1,307 |
|-----------------------------------------------------------------------|
|   Jun 2003 |  40,689 |     3,699 |         68,013 |    6,153 |  2,454 |
|-----------------------------------------------------------------------|
|   Sep 2003 |  55,011 |     5,001 |         91,949 |    8,359 |  3,358 |
|-----------------------------------------------------------------------|
|   Dec 2003 |  71,511 |     6,501 |        327,217 |   29,747 | 23,246 |
|-----------------------------------------------------------------------|
|      Total | 803,239 |    73,022 |      1,330,545 |  120,929 | 47,907 |
+-----------------------------------------------------------------------+
      

8. It is not in dispute that this table shows that the Applicant advised the Commissioner that it was entitled to GST refunds totalling $47,907. The director has admitted to the tax shortfall generated. She further told the Tribunal that she was prepared to repay the refunds received.

9. An officer of the Australian Taxation Office (the ATO) has further recorded that, when required to produce all the source documents to substantiate the claimed amounts in the BAS returns, the sole director and tax agent of the Applicant company, reported that the business dealings of the Applicant were all in cash and no tax invoices were obtained and that, therefore, business transactions were never recorded anywhere (T18-44). The director told the Tribunal that this was not quite correct and that most of the Applicant's business was done in cash but that she had produced some invoices to the ATO.

10. According to the record of interview before the Tribunal, an officer of the ATO who interviewed the director also recorded that the director replied that the Applicant did not have much business activity as such although there was one bank account with the National Australia Bank. The director said that all of the bank statements were packed away and would take her some time to locate (T18-44). The director gave evidence to the Tribunal that she had needed an extension of time but had duly produced the bank statements as required.

11. The documents before the Tribunal that were produced to the ATO by the director are in her name, in her partner's name or in their joint names, but not in the Applicant's name (T2-13). The director gave further oral evidence that this was because most transactions were in cash. She claimed that she had substantiated some of the Applicant's business transactions by the production of invoices to the ATO. However, there were no invoices before the Tribunal.

12. The director admitted to the Commissioner that the amounts in the BAS returns were an ``erroneous inclusion of seemingly excessive accrued income and expenses'' for the business and requested a ``re- submission of amended BAS returns for the above businesses to NIL returns from year 2000'' (T19-45).

13. The director submitted to the Tribunal that she had been accounting for the GST on an accruals basis and had anticipated sales and business which had not eventuated. She argued that the expenses claimed were not excessive. The expenses claimed were provisions for costs incurred in bidding for prospective advertising clients and for the production of paintings intended for sale. Unfortunately, most of the bidding for advertising clients was unsuccessful and paintings remained unsold. The Applicant was continuing to try to sell paintings and become profitable. The director provided a list of galleries with which the Applicant had been dealing and told the Tribunal that she had supplied this list to the Commissioner's auditor. She had negotiated with the auditors about valuing the paintings and reasonable expenses but the auditors had not accepted this course of action.

14. While the Commissioner argued that the Applicant was not operating a business for the purposes of GST registration and therefore was not entitled to claim GST input credits, the director told the Tribunal that the Applicant was a genuine business enterprise and had been operating for 25 years. She gave evidence that she and her former husband had previously run the business and that she had become the sole director when her marriage broke down. She had encountered difficulties. While she had a full time job with another organisation as a registered tax agent, she and another person had tried to operate the business of the Applicant as a joint venture. She denied fabricating business to generate GST credits. She said she was operating a business for the purposes of GST registration. The director also gave evidence that, although the Applicant's income tax returns showed losses for the income years during which she furnished the BAS returns in question, the Applicant was still in business.

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ATC 200

Findings and reasons

15. I find that the Applicant supplied false and misleading information to the Commissioner in the BAS returns under review. I find that the sole director of the Applicant company who was the person who furnished the returns on its behalf, made these statements with intentional disregard of tax laws and to her obligations to furnish the correct information to the Commissioner. The director has not pleaded ignorance of the law and would be hard pressed to do so in view of her full time occupation and registration as a tax agent.

16. The Applicant has not furnished adequate evidence of her belief that she had an entitlement to the GST credits wrongly claimed. There is no documentary evidence before the Tribunal to indicate that any of the alleged business transactions for the whole period from 1 July 2000 to 31 December 2003 took place. The director herself admitted in writing to the Commissioner that the hoped for business ``did not eventually happen'' (T19-45). She offered to reverse the credits claimed and repay the tax refunded to her. She also offered as an explanation for her conduct that she was trying to support herself and her family through her marriage breakdown when these events occurred. The director was going through a difficult time and hoped that her false statements would not be discovered if the business she was pursuing improved.

17. In a similar context, it was held by Justice Drummond in the Federal Court case of
Kajewski & Ors v FC of T 2003 ATC 4375; [2003] FCA 258 that a taxpayer makes a false or misleading statement in a return for the purposes of liability for penalty if the return furnished to the Commissioner contains a statement that is erroneous or incorrect. The director, in my view, is clearly guilty of making a false or misleading statement in each of the 14 returns before the Tribunal. Some erroneous statements are more serious than others, and the margin of error has increased gradually over the period from September 2000 to December 2003. The last return in December 2003 resulted in a refund claim of $23,246. This indicates to me that the Applicant, through its director, was becoming bolder rather than repenting of her actions over the previous three years.

18. Tax ``shortfall amount'' is a term defined in section 995-1 of the Income Tax Assessment Act 1997 as having the meaning in section 284-80 in Schedule 1 to the Tax Administration Act 1953 (the TAA 1953). Section 284-80 provides that a shortfall amount is the amount by which the credit claimed is more than it otherwise would be if the statement were not false. The Applicant was not entitled to claim GST input tax credits as it did in the 14 BAS returns. Therefore, the Applicant had a shortfall amount according to subsection 284-80 of Schedule 1 of the TAA 1953, in the amount of $47,907. The shortfall resulted from the Applicant's false statements in its BAS returns.

Penalty for having shortfall amounts

19. I find that this is a case of wilful deceit and that the penalty was correctly assessed at 75%. The Applicant company was plainly not carrying out the transactions for which the director claimed GST had been paid. There was clearly a tax shortfall within section 284-80 of Schedule 1 of the TAA 1953.

20. Section 284-75(1) of Schedule 1 of the TAA 1953 provides as follows:

``You are liable to an administrative penalty if:

• (a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law; and
• (b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
• (c) you have a *shortfall amount as a result of the statement.''

The table in subsection 284-90(1) of Schedule 1 to the TAA 1953 provides at item 3 that:

``1. Your *shortfall amount or part of it resulted from intentional disregard of a *taxation law by you or your tax agent,

The base penalty amount is 75% of your shortfall amount.''

21. The director was apparently under unusual strain when she succumbed to the temptation to make the false statements in the BAS returns she lodged on behalf of the Applicant. However, her conduct was nevertheless wilful. The period over which the Applicant made false and misleading statements regarding its total supplies and acquisitions, and input tax credits extends over more than 3 years, on the BAS returns lodged for the period

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ATC 201

1 July 2000 to 31 December 2003. These statements resulted in the Applicant having shortfall amounts. Therefore, the Applicant is liable to penalty under section 284-75(1) of Schedule 1 to the TAA 1953.

22. Section 284-90 of Schedule 1 to the TAA 1953 provides for the calculation of the amount of penalty payable and the rate of penalty, which is determined according to the behaviour that led to the shortfall amount. Relevantly it provides that, where the shortfall amount resulted from intentional disregard, the appropriate penalty is 75% of the shortfall amount or part.

Intentional disregard of a taxation law

23. In my view, the element of ``intentional disregard'' is established by several aspects of the evidence before the Tribunal including the following:

• • All of the 14 BAS returns were prepared by the director who was a registered tax agent and who had been employed in that field;
• • On 19 March 2004, during the course of an interview, the director, was recorded as advising that all business dealings of the Applicant were in cash and no tax invoices were obtained on those dealings;
• • No business transactions were recorded anywhere in material furnished by the Applicant or put before the Tribunal;
• • The accounting records and bank statements which were provided at the request of the ATO and before the Tribunal were either in the name of the director, in her partner's name or in their joint name, but not in the Applicant's name;
• • The director's admission that ``I am deeply sorry for the erroneous inclusion of seemingly excessive accrued income and expenses'' for the Applicant's business ``that did not eventually happen but not subsequently reversed to adjust the resulting refunds'';
• • The director's admission that ``the driver for my conduct was... to truthfully and honestly assist in temporarily assisting me in supporting my family'' and that ``I have also tried various losing business ventures in desperation hoping to top up the income...'';
• • The director's own request ``for re-submission of amended BAS returns for the above businesses to Nil returns from the Year 2000'';
• • The director's claims that she made voluntary disclosure however the first indication of her co-operation with the ATO before the Tribunal is subsequent to the commencement of the Commissioner's audit; and
• • The Applicant's income tax returns, all prepared by the director, for the income years ended from 30 June 1994 to 30 June 2002 inclusive, claimed losses in every return with a total loss of $146,841 for the above years. The Commissioner informed the Tribunal that these assessments have also been amended to reduce the losses claimed to nil as a result of the Commissioner's review of the Applicant's tax affairs.

24. The courts have provided some insight into discovering intention. The ordinary meaning of the word ``intend'' is ``to mean, to have in mind''. It follows that intentional behaviour is the directing of the mind, having a purpose or design:
Willmot v R [1985] 2 Qd R 413. A person who acts intentionally decides to bring about a state of affairs which the person has a reasonable prospect of being able to bring about, by the person's own act of volition:
Cunliffe v Goodman [1950] 2 KB 237 (See Taxation Ruling TR 94/4 at paragraph 20).

25. A person's intention is a question of fact. It may be proved by direct evidence of a person's state of mind (eg an admission), but may also be inferred from the circumstances or conduct of the person. This is acknowledged in Taxation Ruling TR 94/4 (TR 94/4) at paragraph 21. As well, the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 (Chapter 4, Penalties) states that:

``Where a taxpayer excludes from its assessable income an amount knowing it to be assessable, or claims a deduction, rebate, credit or offset knowing that it is not allowable, the taxpayer will be liable to a penalty of 75% of a tax shortfall... so caused.''

26. The Commissioner also has acknowledged that, for a finding that a taxpayer has intentionally disregarded a taxation law, the

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ATC 202

taxpayer must be aware of their taxation obligations and choose to disregard them: TR 94/4 at paragraph 23. The director, as a member of the accounting profession and a registered tax agent, and in her capacity as the Applicant's directing mind as well as its agent, is in a position to have a better than average understanding of taxation laws. It is also expected of a tax agent that he or she have a high ethical standard in handling tax affairs and have a greater appreciation of the likely consequences of any disregard of taxation obligations. I am satisfied that the director, when acting for the Applicant in preparing its BAS returns and income tax returns, deliberately chose to fabricate amounts for supplies and acquisitions in order to generate refunds. The director's actions are consistent with an intentional disregard of taxation obligations under the income tax laws, as well as the GST and BAS requirements.

Discretion to Remit Penalty

27. Section 298-20 of Schedule 1 to the TAA 1953 gives the Commissioner, or the Tribunal in his place, general discretion to remit penalties. The Commissioner has published guidelines for the remission of administrative penalties in the ATO Law Administration Practice Statement in 2000/9 and 2002/8. Throughout these guidelines, it has been made abundantly clear that penalties will not be remitted where it is evident that the taxpayer intentionally understated tax or knowingly over-claimed a credit.

28. These guidelines are consistent with the policy and purposes of the penalty regime. See further, the comments of Senior Member Pascoe in
Re Michael Kowadlo and Sara Kowadlo and Commissioner of Taxation [2004] AATA 786 at paragraph 10 where he said the purpose is:

``to penalise non-compliance with the requirement of the legislation. Loss of revenue is not the issue.''

The Tribunal, having already found wilful disregard in this case, finds that the Applicant's circumstances and conduct do not justify any remission of the penalties imposed and that it is not appropriate in this case to remit any penalties.

29. As well, the Applicant has failed to prove that the assessment of penalty for having a tax shortfall amount is excessive or should not have been imposed. See
Nozzi Pty Ltd v FC of T [2003] FCA 356 for Justice Stone's judgment as to the Applicant's burden of proof under s 14ZZK of the TAA 1953 in such cases. The Applicant has not demonstrated that the Commissioner's decision not to fully remit the penalties should not have been made or should have been made differently.

Decision

30. The objection decision under review is affirmed.