TENVOC PROPERTIES PTY LTD v FC of T

Members:
RNJ Purvis DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2006] AATA 529

Decision date: 20 June 2006

RNJ Purvis (Deputy President)

The application

1. Tenvoc Properties Pty Ltd ("the Applicant") a property development company failed to include in three business activity statements ("BAS"), provided by it to the Commissioner of Taxation ("the Respondent"), sales of property made by it. Following upon a tax audit the Respondent discerned a tax shortfall in the amount of $100,491 and in addition imposed an administrative penalty on the Applicant in respect of the tax shortfall at the rate of 50 percent and in the amount of $50,254.50.

2. The penalty was imposed pursuant to Division 284 of Schedule 1 of the Taxation Administration Act 1953 ("the TAA") and on the alleged basis that the tax shortfall resulted from recklessness by the Applicant or its agent as to the operation of the taxation law.

3. Whilst not denying the failure to include the sales and admitting that it was negligent conduct on its part the Applicant maintains that the penalty should not have been imposed upon it or that its omission was attributable at the most to a failure on its part or that of its agent to take reasonable care to comply with the taxation law.

4. The issues that then arise for determination in this application are:

The hearing

5. At the hearing of the application the Applicant was represented by Mr Dragan Gasic of counsel and the Respondent by Mr Phillip Bambagiotti of counsel.

6. The documents lodged with the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were admitted into evidence and marked T1 to T17. Documentary material tendered by the parties was also admitted and marked accordingly as follows:

Exhibit A: Affidavit of Mark Cormack sworn 12 April 2006
Exhibit B: Letter from the Applicant to the Australian Taxation Office dated 5 November 2004
Exhibit 1: Statement of Vivienne Hsieh dated 21 March 2006
Exhibit 2: Statement of Lawrence Lai dated 17 March 2006

7. The managing director of the Applicant, Mr Mark Cormack, Ms Hseih and Mr Lawrence Lai, employees of the Respondent and auditors with the field audit section of the Respondent's goods and services tax line, gave evidence upon which they were each cross-examined.

Factual situation and findings of fact

8. The Applicant did not dispute its having omitted to include sales in its BAS for the periods 1 October 2002 to 31 December 2002, 1 January 2003 to 31 January 2003 and 1 November 2003 to 30 November 2003. Indeed in his oral evidence Mr Cormack on behalf of the Applicant said that he should have been aware of the errors and omissions. He said that he did not look at the BAS.

9. The Applicant buys real estate which it intends to develop with the object of selling such property at a profit. The latter is mostly residential property. At the relevant time the majority of its activity was centred in the Castle Hill area of Sydney. Whilst the acquisition of property and its development was effected and managed by the Applicant the actual construction work was carried out by another company, Hunterford Homes Pty Limited of which Mr Cormack was also a director.

10. At the relevant times both the Applicant and the construction company engaged employees amongst which were part-time bookkeepers. The Applicant was also said to have retained the services of external accountants/tax agents which were intended to advise the Applicant and give accounting and tax assistance when requested. Mr Cormack and his wife were involved in the day-to-day business of both companies. Apart from the part-time bookkeepers the Applicant employed a receptionist and Hunterford Homes employed three supervisors and a construction manager.

11. As earlier noted the Applicant employed part-time bookkeepers. There were three or four employed over the relevant time. The Applicant also retained an external accountant/tax agent. It was the practice of the Applicant to have the BAS prepared by the bookkeepers. Mr Cormack at one time in his evidence suggested that after preparation the BAS was sent together with the first page of any sales contracts to the external accountant. According to Mr Cormack the external accountant then was to check the working of the bookkeeper.

12. Mr Cormack said in the course of his cross-examination that "when each of these girls prepared the BAS statements for us and they were checked by our external accountants there was a lot of changes made to those BAS statements" (transcript p21). He also maintained that "… back then the information was going to the accountant because some of the purchases were on a margin scheme some of the purchases were GST-free. I mean it was that changing sort of period. Everything was sent to the accountant with the backup document" (transcript p23) and further when asked "who did the calculations for the margin scheme …" Mr Cormack replied "our external accountant".

13. As events showed this alleged checking could not have been carried out as in the absence of any evidence from the accountants/tax agents no other explanation was forthcoming. It is stated in a letter of 4 February 2005 (T1/3) signed by Mr Cormack that "he (Mr Cormack) has also taken another proactive

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approach by requesting [the accountant] to check all future Activity Statements before being lodged with the Tax Office". This request would hardly have been necessary if it had already been given and applied to the subject BAS in times gone past.

14. The Tribunal does not accept the evidence of Mr Cormack as to the involvement of the accountants/tax agents referrable to the three relevant periods. It is inconceivable that if tax agents were requested to verify BAS and presented with supporting documentation that they would not have observed the blatant errors and omissions identified below in these reasons. The absence of evidence from the accountants is supportive of this decision. The evidence of Mr Cormack to the effect that he has now taken a "proactive approach" and requested the accountants/tax agents to check "all future activity statements" clearly indicates that this was not the practice in the past.

15. Mr Cormack "did not go through them"; that is the BAS. He relied on the bookkeepers.

16. In the course of his cross-examination Mr Cormack admitted that he was negligent and should have picked up the omissions. Whilst initially saying that a number of the bookkeepers were dismissed by him because of their incompetence (T1/3) he later said that their employment was terminated on account of their not having sufficient time to attend to their bookkeeping work even be it they each "had issues" with the BAS. They were each part-time working three days a week, 9:00 am to 3:00 pm. They were not however "dismissed for incompetence".

17. Mr Cormack should have been aware of the entries in the BAS being wrong. When a bookkeeper left half way through January 2003 the statement for January 2003 which was lodged on 14 February 2003 prepared by a new bookkeeper "should have required particular attention by" Mr Cormack. "A change of bookkeeper during a period requires more attention by me and this was not", he said, "given". Mr Cormack admitted that when two BAS were lodged on the same day he "did not look at them". "I did not", he said, "look at the BAS statements". He conceded that "looking at the situation now the accountants could not have looked at the" BAS. As earlier indicated in these reasons the Tribunal does not accept the evidence of Mr Cormack as to the involvement at that time of the accountants. He was aware that his signature to the statements was in order to acknowledge that he had read through them and they were correct. But although he placed his signature upon the BAS they had not been read by him.

18. The above is not to say that Mr Cormack was ignorant of the business being conducted by the Applicant. He signed all of the contracts and was well aware of the matters that should have been included in the BAS. As he admitted "a person in my position at the time should have displayed more care". But more so. He also conceded during the course of his cross-examination that there was a lack of proper control of the bookkeeping and a lack of proper regard for the preparation of BAS.

19. The lack of interest in and concern for the accuracy of the relevant BAS is further illustrated by Mr Cormack's lack of interest in and concern for the accuracy of information he gave to the tax auditors as to sales of properties since commencement of business being "two". Mr Cormack at first maintained that he told the tax auditors there had been four sales. He admitted however in the course of his cross-examination that he did not make notes of his conversation with them and that a record made by the auditors "could" accurately reflect the conversation. The Tribunal accepts the evidence of the auditors in this regard. In fact four properties had been sold in 2002 and 2003. Again when provision of documents was requested by the Respondent they were not produced until a section 65 notice was issued and then outside the requested time frame.

The BAS statements

20. There are three relevant BAS:

21. The tax shortfalls arose from not accounting for transactions relating to three properties namely:

22. In each of the BAS referred to above the GST on sales figures was recorded as $0 even though in each period there was a significant property transaction.

23. The presence of the GST on purchases figures, the input tax credits, should have alerted Mr Cormack to a failure to record GST collections. In each relevant period there was a significant property transaction but no GST recorded as having been received.

Relevant statutory provisions

24. Section 284-75 of the First Schedule of the TAA provides for penalty amounts namely:

"Liability to penalty

  • (1) 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.

    • …"

25. Section 284-90 of Schedule 1 of the TAA sets out the percentage of the tax shortfall amount to be applied by way of penalty. It provides for penalty amounts as follows:

Recklessness and reasonable care

26. The Respondent maintains that the Applicant by Mr Cormack and/or its tax agent acted in a reckless manner in presenting BAS with a tax shortfall.

27. Taxation Ruling TR 94/4 relates to tax shortfall penalties and particularly the concepts of "reasonable care, recklessness, and intentional disregard". As relevant to these reasons it states:

  • "…
  • 6. 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

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    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.
  • 7. Recklessness is gross carelessness. A taxpayer will have behaved recklessly if the taxpayer's conduct clearly shows disregard of, or indifference to, consequences that are foreseeable by a reasonable person as being a likely result of the taxpayer's actions. It is not necessary for a finding of recklessness that the taxpayer should have been acting dishonestly, nor that the taxpayer intended to bring about the consequences that his or her actions caused.
  • …
  • 15. The word 'recklessness' is not a term of legal art that has a special meaning but rather has a well established ordinary meaning which the courts have generally had no difficulty applying. Literally the word 'reckless' means 'without reck', 'reck' being an old English word meaning 'heed', 'concern' or 'care' (R v Bates [1952] 2 All ER 842). The courts, however, have long recognised that the ordinary meaning of recklessness involves something more than mere inadvertence or carelessness (for example, see Derry v Peek (1889) 14 APP. CAS. 337; 5 TLR 625).
  • 16. Briefly stated recklessness is gross carelessness - the doing of something which in fact involves a risk, whether the doer realises it or not, and the risk being such having regard to all the circumstances, that the taking of that risk would be described as 'reckless' (Shawinigan Limited v Vokins & Co Limited [1961] 3 All ER 396). In other words, recklessness involves the running of what a reasonable person would regard as an unjustifiable risk (Reed (Albert E) & Co Limited v London & Rochester Trading Co Limited [1954] 2 Lloyds Reports 463).
  • 17. A person would be acting recklessly if:
    • (a) the person did an act which created a risk of a particular consequence occurring (eg, a tax shortfall);
    • (b) a reasonable person who, having regard to the particular circumstances of the person, knew or ought to have known the facts and circumstances surrounding the act would have or ought to have been able to foresee the probable consequences of the act;
    • (c) the risk would have been foreseen by a reasonable person as being great having regard to the likelihood that the consequences would occur and the likely extent of those consequences (eg. the size of the tax shortfall); or
    • (d) when the person did the act, he or she either was indifferent to the possibility of there being any such risk, or recognise that there was such risk involved and had nonetheless, gone on to do it. That is, the person's conduct clearly shows disregard of, or indifference to, consequences foreseeable by a reasonable person.

  • … It is sufficient that the person's behaviour displayed a high degree of carelessness and indifference to the consequences."

28. In
BRK (Bris) Pty Limited v Federal Commissioner of Taxation (2001) 46 ATR 347 at 364:

"… Recklessness in this context means to include in a tax statement material upon which the ITAA 1936 or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the ITAA 1936 and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the prescribed conduct is more than mere negligence and must amount to gross carelessness.

…"

29. The above observations as to the meaning of "recklessness" were adopted by the Court in
Hart v Commissioner of Taxation (2003) 131 FCR 203. Further it may be said that recklessness entails deliberately running an unjustifiable risk (
Albert E Reed & Co Limited v London & Rochester Co (supra) at 475;
Re

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Jones and Commissioner of Taxation [2003] AATA 84 at [26];
Re Arrow Pearl Co Pty Limited and Commissioner of Taxation [2005] AATA 340 at [98]).

Applicant's contentions

30. It is contended on behalf of the Applicant that the Respondent was in error in concluding that it acted recklessly. The Respondent may have concluded that the Applicant acted without reasonable care but should have exercised its discretion to remit any penalty which would otherwise have been imposed. The evidence of Mr Cormack it is maintained demonstrates that in all the circumstances reasonable care was taken.

31. The Applicant notes that Mr Cormack did not prepare the statements himself. He signed them when presented to him by the bookkeeper on whose skill and experience, he maintained in his cross-examination, he could reasonably rely. It would be unreasonable to expect him it is said to check their work. He exercised reasonable care and his conduct did not amount to recklessness.

32. It is also maintained that no inference adverse to the Applicant should be drawn by it not adducing evidence from the bookkeepers and/or the accountant/tax agent. It is said that there is no dispute as to the BAS being inaccurate "due to poor or no accounting". In the opinion of the Tribunal the documents themselves however do not demonstrate this as necessarily being so. They were incorrect, but the reason or reasons for such a state of affairs could only have been evidenced by the persons responsible for their preparation or verification. But why they were incorrect is not known. An inference can be drawn that neither the bookkeepers nor the accountant/tax agent would have been able to provide an explanation as to how it was the statements were incorrect. The Tribunal is left with the evidence of Mr Cormack to the effect that he terminated the employment of bookkeepers on account of their being unable to effectively handle the work required of them. There is not any evidence other than that of Mr Cormack, which the Tribunal does not accept, as to what action if any the accountant/tax agent took referrable to the BAS.

33. It is open on the evidence be for the Tribunal to conclude that the accountants at that time did not play any part in checking the BAS before they were signed by Mr Cormack. It is more likely than not that this was the then situation. Indeed in letters of 5 November 2004 and 4 February 2005 Mr Cormack did not make any mention of the accountants having checked the BAS at the relevant times before they were lodged and accused the bookkeepers of "incompetence" an allegation he did not maintain, or evidence, at the hearing.

34. But Mr Cormack was on notice of the problem with the bookkeepers. He concedes that the responsibility to ensure the statements were accurate fell upon him and that he failed in this regard. His excuse namely "his busy work schedules, the need for full-time bookkeeping staff and the pressure of maintaining his business" illustrates the degree of importance, or lack of it, he gave to the BAS and a possible tax shortfall.

Respondent's contentions

35. The Respondent maintains that the BAS for the relevant periods contained statements that were false and misleading in a material particular amounting to and resulting in a tax shortfall. As a result the Applicant is liable to pay an administrative penalty pursuant to section 284-75 of the First Schedule of the TAA. The shortfall is said to have been a result of the recklessness of the Applicant in the conduct of its taxation affairs in that:

36. The Respondent further maintains that the lodgement of BAS which contained incomplete and inaccurate information, the inefficient bookkeeping in relation to its tax

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affairs, the making of misleading statements to the tax auditors, the failure to provide documents other than following a section 65 notice and even then out of the time limit, illustrate conduct of the Applicant precluding the remission of the administrative penalty in whole or in part.

Findings and decision

37. The Tribunal does not accept the evidence of Mr Cormack to the effect that the errors and omissions in the BAS were attributable to "incompetence" on the part of the bookkeepers. He did not so maintain in answers given during his cross-examination at the hearing. Nor does it accept that the bookkeepers were or are to shoulder responsibility in a relevant sense for any errors or omissions. Responsibility for accuracy of the BAS was that of the Applicant and Mr Cormack.

38. Mr Cormack was however aware of the pressures upon the bookkeepers and their seeming inability to attend effectively to the work required of them employed as they were on a part-time basis. Being so aware he should have exercised care and given due attention to the potential for and possibility of errors in the BAS. On the evidence he acted mindless of this potential and possibility. The Tribunal does not accept that Mr Cormack could rely on the bookkeepers' work being verified by the accountant/tax agent, for it was not.

39. Nor is it any answer or an acceptable excuse for Mr Cormack to rely as he did in his letter of 5 November 2004 and in his evidence upon his "not" having "enough time to thoroughly check the statements prepared". The omissions were apparent on the face of the BAS. There was no need for him to recalculate the figures in order to discern an error. The absence of any dollar amount should have put him on notice of an irregularity or at least caused an enquiry to be made. He clearly did not exercise reasonable care or indeed any care in relation to the accuracy of the material entered on the statements. It is unlikely that he gave the particulars on the statements any attention at all. The magnitude of the omissions in relation to the sales as a whole and in one instance, November 2003, no sales being shown at all when in fact they had amounted to $585,090 would and should have put Mr Cormack on notice of error.

40. The Tribunal is satisfied that the subject BAS contained errors and omissions which led to a significant tax shortfall. Whilst the errors and omissions may initially have arisen from deficient bookkeeping they should have been noticed and rectified by Mr Cormack, he having intimate knowledge of the Applicant's property transactions. The $0 GST collections could not have been correct and should have been checked before the BAS were lodged. They were not. Mr Cormack did not concern himself with the material set forth in the statements, even be it the work of the part-time bookkeepers was to his knowledge unsatisfactory. His lack of interest in and concern for accuracy was maintained, in his answer to the question put by the tax auditor and in the tardiness with which he caused compliance with the section 65 notice.

41. The Tribunal is further satisfied that the conduct of Mr Cormack with reference to the relevant BAS clearly shows a disregard for, if not an indifference to the foreseeable consequences of, the bookkeepers' not accurately recording sales on the BAS. In all of the circumstances and having in mind the problems that he had experienced with the bookkeepers, not only did he not take reasonable care, he took no care. The consequence of his indifference to the contents of the BAS should have been foreseeable by him or indeed any reasonable person with his knowledge and awareness. He deliberately ran an unjustifiable risk that the BAS were not correct. He knew that mistakes had been made by the bookkeepers in the past and that they were not able as part-time employees to effectively carry out their assigned tasks. He was grossly careless in this regard.

42. The Tribunal has noticed the practice statements of the Respondent (viz PSLA 2006/2) with reference to remission of penalties. It also notes the view generally taken that where a taxpayer has failed to make a genuine effort to fulfil a taxation responsibility and has acted recklessly, no remission should be granted.

43. But this is a discretion to be exercised by the Tribunal. The facts and circumstances of

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this particular matter are to be considered in the light of reaching a decision.

44. The Tribunal is satisfied as earlier discussed that the Applicant by Mr Cormack was reckless and grossly careless in regard to the conduct of its taxation affairs. It showed an indifference to and a disregard of the consequences of its conduct referrable to its taxation position. The conduct of the Applicant with reference to answers given to the tax auditors and tardiness with reference to compliance with a section 65 notice are also here relevant. No remission should be granted.

45. For the reasons set forth above the Tribunal affirms the decisions under review. The penalty is to remain without remission.

 

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