Case U36
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
1. Introduction
1.1 These reasons for decision relate to several distinct references. In the order in which they were heard, they are the references of:
- F an employee shareholder;
- A a colonial pensioner;
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- M a salesman;
- W a shopkeeper;
- N a scallop-splitter;
- R a truckdriver; and
- K a husband.
1.2 As there will be many references throughout these reasons to "percentages", it is appropriate at the outset to emphasise the importance of correctly identifying the subject of the percentage reference in order to understand the significance of the reference. When additional tax of $1,000 is levied following the raising of liability to $2,000 in tax on understated income, the taxpayer tends to say that he has been penalised "50%", and the Commissioner tends to say that he has remitted "75%". Properly understood there is no inconsistency between the statements. The apparent inconsistency only arises because they are using the "percentage" concept as a function of different things. The taxpayer is referring to the additional tax ($1,000) as a function of the further primary tax assessed ($2,000). On that basis the appropriate percentage is 50%. On the other hand the Commissioner is referring to the additional tax ($1,000) as a "percentage" of the additional tax which might have been levied ($2,000 or 200% of the tax avoided). The reduction is accurately referred to as 75%.
1.3 The first thing which the applicants share in common is that they were under-assessed to income tax pursuant to the Income Tax Assessment Act ("the Act"); the Commissioner issued amended assessments to rectify that; and, because the Commissioner has held them to be responsible for the under-assessments, he has also imposed on them liability for additional tax. Other common factors are that they seek an independent review of the Commissioner's determinations; that they have appeared before this Tribunal unrepresented by lawyers or professional advocates; that they share the same cultural background, with English as their first language; and that on any view they are hardly to be identified with the top tax evaders in the community. Even so, many small acts of evasion can equal the effect of one act of evasion on a large scale. (I note that I would have been greatly helped had I had the assistance of the thoroughly presented and closely argued cases of counsel. "Assistance" from counsel is no mere term of courtesy.)
1.4 In each case the Commissioner assessed additional tax as the compound of two factors: the first, a compensatory factor (interest on the tax avoided at the rate of 10% p.a. from the time of original assessment up to 13 February 1983 and at 20% thereafter until near the date of the amended assessment); and then a culpability component expressed as a percentage of tax avoided (not as a percentage per annum). The culpability factor was meant to be calculated at varying rates, with the normative rate being 40%, to be adjusted up or down in special circumstances. The amounts of additional tax to be reviewed range from a low of $158 to a high of $20,761.
1.5 Although generally the Commissioner's practices in these matters have been as proclaimed by his 1983 Guidelines (cf. post), it has not been a common practice of the Commissioner to advise taxpayers how the amount levied by way of additional tax for incorrect return has been calculated. Old practices have continued despite the introduction of new, different and more severe standards. The taxpayer usually only receives an assessment incorporating a debit figure identified by a code letter which in turn refers to "additional tax for incorrect return". Further, that information is not normally provided to the Tribunal when the taxpayer's request that his objection be referred on for review is complied with. Usually the Commissioner explains the decision in question by referring to the fact that by reason of the understatement the taxpayer is liable to additional tax at the rate of 200% of tax avoided and that the Commissioner has remitted a specified percentage of that possible additional tax. Sometimes the Commissioner states what the relevant amounts are in dollar terms. Those practices are unfortunate. Most people resent being punished, particularly when they cannot identify the person imposing the punishment; they have not been heard in mitigation; and they feel that the punishment imposed is both arbitrary and excessive. If they could be told at the time of assessment that the imposition is in part - sometimes in very large part - only compensatory in nature and only as to the balance a penalty, they might feel less unjustly treated. I have presided at Preliminary Conferences where obviously intelligent taxpayers, on learning of the method of calculation for the first time, have thought it not
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unreasonable and have thereon immediately withdrawn their references.1.6 The failure to disclose the detail of the calculations and reasons is also unfortunate for another reason. The non-disclosure can deny the taxpayer an opportunity to check whether the Commissioner has made an error in giving effect to his decision as to the implementation of the Guidelines. Such errors can and do arise, as they have done in relation to some of these references. Following the hearing, my analysis of figures did not reconcile in all cases with the advice I had received from the Commissioner's representative during the hearing. I had the matters checked through the Registrar and some errors were disclosed. Further, the detailed calculations then supplied to the Registrar were not in all respects precise although for the most part the errors were not significant. (For further detail reference should be made to the calculations relating to M (para. 2.16) and N (para. 2.28 and 2.29).) I am conscious that the calculations for compensatory interest ordinarily only extend up to a date (undisclosed) on which calculations for the assessment which later issued were prepared. For my part in future references I propose, for the time being at least, to require full and precise details as to the calculations made showing quantum of tax omitted; commencement and closing dates for each period of calculation; percentages applied; and amounts so calculated, reconciled to the additional tax assessed. As I have not had the benefit of that detail, I can only hope that I have not fallen into mathematical error myself.
1.7 I have referred to the assessment of interest at 10% p.a. up to February 1983 and at 20% p.a. thereafter as "compensatory". The rates are the same as those which have operated or now operate against taxpayers who delay in paying tax which has been assessed against them and which has fallen due for payment. To that extent use of the same rates against taxpayers who have had the benefit of causing a deferment of assessment seems not unreasonable. However, it should be noted that the rate of 20% p.a. is, for most people at most times, a high rate of interest, just as the 10% p.a. rate applicable in the years immediately preceding the change to 20% p.a. was low. No doubt the rate of 20% p.a. was chosen to deter taxpayers from delaying payment of tax.
1.8 But it should not be overlooked that a 20% p.a. rate does work severely, and even harshly, against persons such as these applicants. None of them belongs to the world of high finance. None of them controls great wealth, or holds high office, or exercises great power. Some of them did not, in any realistic sense, even have an opportunity to avoid liability during the period of accrual. Assuming that the moneys withheld were available to them for investment, rather than in meeting reasonably incurred expenses of living from day to day, it is unlikely that any of these persons could have earned any more than 12% p.a., which earnings would in turn have been liable to tax. The result is that persons whose gain from delay may be only about 10% p.a. after tax can be liable to pay 20% p.a. - non-deductible - on tax avoided. It is not always a major consideration, but it is a matter which I will take into account in assessing the appropriate culpability factor after bringing to account the "compensation factor" as calculated by the Commissioner in order to determine an appropriate figure for additional tax.
1.9 Comparative details as to the assessments made are as follows:
Intended
Final Final Increase Additional Delay: fault
Year Untaxed income tax in tax tax months factor
$ $ $ $ $ '
F 1983 475 21,291 5,511 218 158 18 40%
A 1983 4,098 52,373 22,142* 2,470* 1,607 18 40%
1984 4,153 13,810 2,821 1,263 574 6
M 1981 1,615 5,205 372 372 338 31 40%
1982 4,470 6,464 726 726 435
* These figures appear to be excessive to the extent of $12.
** These figures relate to additional tax for late returns.
† The period includes the "late return" period to March 1983.
‡ Figures for "Final tax" and "Increase in tax" are the same. But for the omission, no tax would have been payable.
~ The amended assessment reduced "Spouse rebate" from $989 to $398.
It was not disclosed to what extent (if any) liability continued to increase after assessment at the rate of 20% p.a. (non-deductible) by reason of non-payment.
1.10 Each applicant seeks a review of the determination of the Commissioner and it is the responsibility of the Tribunal in each case to determine whether the Commissioner's exercise of discretion should be reviewed further. In discharging its responsibility to review the Commissioner's decisions (sec. 192) the Tribunal exercises all the powers and functions of the Commissioner (sec. 193(1)). Its responsibility is to so exercise those powers and functions as to determine whether the assessment before it is correct and, if not, to give effect to what is, in the opinion of the Tribunal, the correct decision. As Smithers J. said in
Drake v. Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at p. 77:
"It might be thought that it would be open to the Administrative Appeals Tribunal not to decide for itself whether a decision made by an administrator was the right decision which ought to have been made in the circumstances but rather to satisfy itself that the decision of the administrator was one which an administrator acting reasonably might have made. But to do this would be to review the reasons for the decision rather than the decision itself. It is the actual decision which by virtue of s. 25(1) and (4) of the Administrative Appeals Tribunal Act the Tribunal is authorized and required to review. The duty of the Tribunal is to satisfy itself whether a decision in respect of which an application for review is duly instituted is a decision which in its view, was objectively, the right one to be made."
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In so holding I am not unconscious of comments of Menzies J. in
Stewart v. F.C. of T. 73 ATC 4007. In that case a Taxation Board of Review had reviewed and affirmed a decision of the Commissioner allowing only so much of wages paid to an associated person as, in the opinion of the Commissioner, "was reasonable" pursuant to sec. 65 of the Act. His Honour dismissed an appeal from the decision of the Board. In doing so his Honour said at p. 4009:
"Section 65 commits the decision as to the amount to be allowed as a deduction to the opinion of the Commissioner and it would, I think, be a special case in which either the Board of Review or the Court could be satisfied that the Commissioner's opinion was mistaken. This is not such a case."
1.11 I do not understand his Honour's observation to be a comment about the function of "review". I infer that from the fact that his Honour was speaking to a submission that "it was an error on the part of the Commissioner not to accept what was actually paid as reasonable". Further, his Honour related his comment to both the Court as a court of law and a Board of Review as an administrative tribunal. I do not understand his Honour to have been proposing that the powers of review were to be restricted by reason of some presumption that the decision of the Commissioner under review was correct or as suggesting that the review body should not upon a review substitute its own view on the evidence for that expressed by the Commissioner. Such a view would greatly and unduly limit the scope of the review process. Even if I am incorrect as to that, I hold that the view expressed by Smithers J., and regularly applied in proceedings before this Tribunal, is the correct view.
1.12 The Tribunal in determining each case should act consistently, and be able to offer to each applicant an explanation as to why the penalty finally determined upon in his case is greater or less than in the other cases expressed in both absolute terms - how much? - and relative terms - what percentages? If additional tax for one applicant is to be reduced from $500, but for another confirmed at $15,000, the reasons should be openly stated and subject to public appraisal and review. That is not to suppose that the reasons will always persuade, particularly some of those persons who must bear the penalties.
1.13 In reviewing the particular decisions under reference I will comment in a general way on many matters but only in order to establish a basis for particular conclusions. That should not be seen as an attempt to formulate a policy as to the implementation of sec. 226 or the provisions which have succeeded it. Rather my concern is only to establish relativities between these applicants and to endeavour to explain the factors taken into account in reaching the decisions to be made.
2. The taxpayers
F - The employee shareholder
2.1 During the year of income ended 30 June 1983 F was one of many employees given an opportunity to subscribe for shares in the holding company of their employer under a scheme for the acquisition of shares by employees. He acquired 500 shares at a cost price of 50 cents each at a time when the market price was $1.45. By letter of late June 1983 he was notified in writing by the holding company (Media) of the provisions of sec. 26AAC(5) of the Act and that the company was of the opinion that he would be assessable on 95 cents per share: $475. His return of income was assessed in October 1983 without that sum having been included in the computation of his taxable income. In November 1983 [sic] the Commissioner obtained from Media a list of all employees who had subscribed for shares under the scheme and, after consideration, formed the view that Media's expectations as to the quantum of assessable income were correct. Later the Commissioner audited the returns of the employees named and discovered that of some 180 to 190 employees who had subscribed, about 80 had not been assessed on the "income". F was one of them. An amended assessment issued on 14 February 1986 to recover an additional $218 in tax. Additional tax was levied at $158. The culpability factor was 40%. According to the Guidelines, it was probably 40% for the others too.
2.2 In 1983, when F set about the preparation of his income tax return, he retained the services of a tax agent. He failed to provide his tax agent with a copy of Media's letter previously referred to, but none the less
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he did disclose the fact of the acquisition of shares under the scheme to his tax agent. The tax agent did not incorporate reference to the shares - or to the assessable income derived upon their acquisition - in the body of the return, but he did add a footnote to a schedule to the return. That immediately followed a table of figures and comments relating to a quite different matter: "Other expenditure incurred in earning your income." It could easily have been overlooked, particularly by an assessor who was under undue pressure of time. The comment read:"During the year I was invited to purchase 500 shares in (Media) Ltd. for 50 cents each, at the time of purchase the market price was $1.75 which indicated a paper profit of $625. [sic] Shares are still held."
The return also disclosed that throughout the year of income F had been employed by a television station operated by a company which was, and was widely known to be, a wholly owned subsidiary of Media.
2.3 F points to the annotation as constituting a "full and true disclosure" for the purposes of sec. 170 of the Act such as would deny the Commissioner the right to issue any amended assessment otherwise than to correct an error in calculation or a mistake of fact. I am not persuaded that it was such a full and true disclosure. What was said was "true" - I do not think overstatement of the "profit" made it untrue - and it should have been obvious to any assessor who read the statement that it was a statement made because of its relevance to the taxpayer's obligation to make disclosure of all matters material to his assessment. However, it was not, I think, "full", even if only because it did not identify the vendor; or state that the opportunity to purchase came to the taxpayer both as an employee and pursuant to a scheme for the acquisition of shares by employees. However, even if I should be incorrect as to that, there is nothing in the evidence before me which persuades me that the amendment was made otherwise than to correct "a mistake of fact".
2.4 The next question is whether sec. 226 can apply at all. It only applies in circumstances such as these if the taxpayer "omits from his return any assessable income". I am not persuaded that he avoids that finding by presenting such information as he did in a schedule to the prescribed form in the way of a sentence sub-joined to other information about unrelated aspects of his return - particularly when the prescribed form was complete on the face of it and did not acknowledge the possibility of further income. I am of opinion that sec. 226(2) does apply.
2.5 That being so, the next question for determination is whether in all the circumstances the penalty is appropriate and, indeed, whether there should be any penalty at all. As to that it is appropriate to contemplate the question whether any penalty could properly have been imposed if the assessor had been more observant and under less pressure, or more astute, and had considered the information provided; recognised it as being relevant to the assessment of the taxpayer; and thereupon assessed the $625 as part of the taxable income of the taxpayer. Had he done so would any penalty have been in order? I do not think so.
2.6 In the circumstances of this applicant I am of the opinion that the only criticisms to be levelled at him are that he failed to provide his tax agent with the circular letter from his employer, and that his tax agent - for whose actions he is responsible - failed to more precisely and completely explain what had happened in his annotation; failed to present the annotation in such a way as to indicate that it related to distinct subject matter from other material on the page; and failed to make provision in the figures collated in the formal parts of the return for the inclusion of what was then believed to be the profit. On the other hand, although there were some inadequacies in the making of the disclosure, there was no attempt at concealment.
A - The colonial pensioner
2.7 A was an Englishman who, following a career in Africa in the colonial service, migrated to Australia in 1968. He took up employment in a senior position with a substantial organisation within the Media group - cf. ante - and worked with that organisation until his retirement on 30 April 1983. (Like F he was one of the 180-190 employees who were subscribers for shares in Media. Unlike many others, he disclosed the purchase and the profit.) Upon retirement he received substantial amounts by way of leave and retiring allowances which operated to
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distinguish his income tax return for that year from those preceding it, just as the return for the following year would reflect the change to retirement. During the 1983 year he received, as he had received from his arrival in Australia, a monthly pension in relation to his colonial service.2.8 The pension fell into two parts: one part paid by the former colony (the Republic) which was taxed at source and was exempt from income tax in Australia; and the other paid by the United Kingdom. The latter constituted assessable income for Australian income tax purposes. A was well aware of the distinction. So were his accountants. In accordance with his usual practice he took detailed, written instructions as to his income and deductions to his tax agents but with the figures for "UK/(Republic)" pension omitted. They had not been calculated in $A. He also provided his accountants with the remittance notices forwarded to him monthly by Crown Agents, United Kingdom. That information was to be used by his accountants in order to establish his pension income in Australian dollars and to distinguish between the taxable and non-taxable components of that pension. When the return of income was presented to him for signature, no amount of pension had been brought to account in the computation of taxable income. Further, in the formal body of the return under Item 3 ("Pensions Allowances, Benefits") there was a reference to payment by the Republic marked as "non-taxable". There was no reference to any United Kingdom pension. In so far as the pension was paid by the Republic that statement was correct, but whether the statement was intended to refer to the totality of the pension or not was not clear. Whatever may have been the case the applicant did not notice the error.
2.9 In the following year, the first full year of retirement, the process was repeated but on this occasion he stated in his instructions to his accountants that the totality of the pension was $5,160, although he made no attempt to distinguish the taxable and non-taxable components. On this occasion in the Return, under Item 4 ("Other Pensions etc."), there appeared the entry "Republic of... $5,160 not taxable".
2.10 The returns so presented were assessed on 29 April 1984 and 27 May 1985. Following enquiries later made by the Commissioner of the tax agent, amended assessments issued on 27 November 1985 increasing the taxable income of the applicant by $4,098 and $4,153 respectively. Tax was increased by $2,470 and $1,263. Penalties by way of additional tax were levied in the sums of $1,607 and $574 respectively - a total of $2,181. The chosen culpability rate was 40%.
2.11 The accountant to the taxpayer gave evidence in an endeavour to explain how the errors had occurred. He was the senior partner in a firm of accountants. He personally accepted full responsibility for the errors from the time they were brought to his attention. He could not explain how the error was made in the first year or how it came to be repeated in the second. He was at all times fully aware of the fact that part of the pension constituted assessable income. For many years he had calculated the assessable income component and included it in the computation of assessable income. His evidence was that in 40 years within the accounting profession and 36 years as a qualified accountant he could not recall any similar error on his part. His firm volunteered to indemnify their client in relation to liability to additional tax and it did so. He regarded the penalty as an imposition on the firm rather than upon his client and he considered it to be an extremely harsh penalty for a mistake which, although repeated, was overall an isolated mistake, honestly made. It is significant that the person responsible for the error gained nothing by it, and suffered the serious personal and commercial embarrassment of having to admit error to his client, quite apart from providing any indemnity.
M - The salesman
2.12 The applicant is a young man who was born in 1957. He is and was articulate and self-confident. At the commencement of the 1981 year of income, he was employed as a real estate salesman. Following a motor accident, in which he was injured and his car acquired on a hire-purchase was damaged, he was unemployed for a few weeks during which he received social service benefits amounting to $2,000. He then secured a position as a salesman with the real estate division of a substantial, stock exchange listed company. He continued in that employment from 2 September 1980 until 16 April 1982.
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2.13 He was employed on the basis of a weekly retainer. It averaged approximately $122 per week throughout his employment. The retainer was paid regularly but only after the employer had withheld PAYE deductions in accordance with the employer's obligations under the Income Tax Assessment Act. In addition M was entitled to further commissions upon sales he effected. Such commissions varied in amount according to sale prices and were ordinarily only payable upon completion of the sale which usually only occurred a substantial period after M's endeavours had been concluded. M frankly admitted that at the time he was living beyond his means and that in consequence, in so far as he was able to do so, he drew his commissions in advance. Neither side called any officer of the employer as a witness. (M probably did not know that he was entitled to do so.) Although his evidence was that he kept no records of his commission earnings, I am satisfied that he was very conscious of his entitlements arising from each sale and that he pressed his employer until he received the amounts due to him; and that he was at all material times well aware that the amounts of his gross entitlements were paid to him without any deduction for income tax.
2.14 On 28 July 1981 he prepared his own income tax return to 30 June 1981. On 15 July 1982 he also prepared his income tax return to 30 June 1982. In each case M was considered to have no tax to pay, and all PAYE deductions were refunded.
2.15 In summary the returns disclosed the following:
1980 1981
$ $
Salary to 17.7.80 (Tax $48) 360
from 2.9.80 ( 727) 5,128
- to 16.4.82 ( 704) 5,260
from 14.5.82 ( 92) 592
Social Services 2,000
Dividends 7
Rental 190 2,500
Other 92
----- -----
7,685 8,444
Less:
Telephone $136
Motor vehicle expenses $3,314 2,413
-----
Entertainment 1,040
------
4,354 2,549
PA Insurance 240
Property maintenance 1,362 2,142
----- -----
expenses
5,956 4,691
------ ------
Taxable Income returned $1,729 $3,752
------ ------
2.16 In preparing those returns of income he accurately reproduced the information comprised in the group certificates provided for him by employers. When it later appeared that M had derived additional income from the latter employer in sums of $1,615 and $4,470 amended assessments issued on 24 April 1984. Tax was levied at $372 and $726 and additional tax was levied at $338 and $435. That reflected a culpability penalty rate of some 50% to 55%, but that was not what was intended. A 40% rate had been proposed - in accordance with the Guidelines, but an error was made in relation to each year. The additional tax was intended to be $252.29 and $391.37. The fact of the errors only came to light after the hearing. Although the calculations were made by computer, the machine could not identify or rectify the human errors reflected in its instructions.
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2.17 M protested, contending that he had at all times acted in good faith and in complete reliance upon the accuracy of the representations made by his employer in the form of the group certificates. Further, he contended that he had wholly discharged his duty to the Commissioner in that he had complied with the "1981 Form S Tax Guide" instructions issued by the Commissioner which had said (inter alia):
"Copy the information from your group certificate or tax stamp sheets into this section (referring to Item 1 of the prescribed form). Check that you have copied it correctly."
Similarly he referred to "1982 Forms A and B Instructions" issued on behalf of the Commissioner which said (inter alia) "Any employer you have had during the year is required to provide you with a group certificate or tax stamp sheet (or statement of earnings where tax instalments have not been deducted from your earnings) in time for completion for your return".
2.18 I am satisfied on the evidence that it was an obligation of the employer to deduct tax from the commissions payable to M (sec. 221C), but I am equally satisfied that it did not do so; and that M knew that it had not done so. M was an intelligent young man and, as I have said, I have no doubt that he was at all material times aware of his entitlements vis-a-vis his employer and that he made sure that he received all to which he was entitled. However, I am not convinced that he was conscious in July 1981 that his earnings from that particular employment to the previous 30 June had been $6,743 rather than $5,128. On the other hand I am sure that a moment's reflection at the time of presentation of his return would have brought the matter to mind. As to 1982, on balance I think the same conclusion appropriate. Although the order of discrepancy was higher, he had left that employment three months previously. I so find despite the fact that he claimed in his 1981 return expenses of $4,354 against admitted income as a real estate agent of $5,488 and in 1982 he claimed expenses of $2,549 against income from that source of $5,260. His evidence was that his earnings with the company were "little better than social services", but if the information in his return of income had been correct his net earnings fell far short of "social services".
2.19 I am not persuaded that M had a positive belief in the accuracy and completeness of the group certificates provided to him or in the accuracy of the material portions of either income tax return. Although his employer is not without blame, and might be held liable to account to the Commissioner for the tax it should have deducted (sec. 221N), the error in the tax return is essentially that of M. At the very least he was quite careless in asserting the income tax returns to be accurate. However, I find nothing in M's responses - as they appear in the evidence - as constituting an aggravating factor in relation to the rate of penalty intended to be imposed. Acting as his own tax agent may have made him a nuisance and inconvenience, but that is not relevant.
W - The shopkeeper
2.20 W is a lady, no longer young but not yet old, who became self-employed for the first time in April 1979 when she purchased a small shop in a small industrial town some distance from a regional city at a cost of $24,000 for the freehold; $6,000 for goodwill; and $4,812 for plant and equipment. Thereafter, with the occasional assistance of casual help, she worked the shop alone operating 12 hours per day, seven days per week. Her previous work experience did not involve clerical duties. (At the time of the hearing she was unemployed, although why that was so was not explained - I draw no inference from that fact.) From the commencement of the business she kept all invoices and maintained a tally of her takings on a daily basis, summarised weekly. She paid for some small purchases in cash and others by cheque. She soon found that she was carrying a needlessly large credit balance in her trading bank account and from that point of time she followed a practice of only keeping sufficient funds in that account on a non interest-bearing basis to provide for payments likely to be made by cheque. Other takings not required to be kept on hand from day to day were deposited to savings bank and building society accounts on an interest-bearing basis. Initially she had one such account but later held as many as four. She endeavoured to secure maximum interest returns.
2.21 Partly because of her commitments to the business; partly because of her unfamiliarity with the requirements of record-keeping appropriate for income tax returns; partly because whenever she tried to sort out the
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invoices she found it too difficult and put it off, she did not arrange for the lodgment of any income tax returns with the Commissioner until 31 March 1983. On that date she signed returns in relation to years of income ended 30 June 1979 to 1982 inclusive. She achieved that by retaining the services of a reputable firm of accountants. Significantly, she did that of her own initiative. The accountants prepared returns in accordance with her instructions and from the documents she provided. The returns were assessed as lodged and penalties were imposed for late returns. Later her 1983 return was lodged and assessed. Later still the affairs of the taxpayer were subjected to investigation by the Commissioner and it then appeared that W had had significant income not disclosed in any of the returns previously mentioned; and, further, that deposits to those interest-bearing accounts had in large measure comprised undisclosed gross takings. There was no suggestion of attempted concealment or of non-co-operation at that time. Amended assessments issued on 14 May 1985 increasing additional tax for late returns and imposing additional tax for incorrect returns. Taxable income for year ended 30 June 1979 was reduced from $5,367 to $4,638, but in the four subsequent years was increased. Taxable income rose from $10,815 to $32,720 (302% increase); from $10,404 to $33,939 (326%); from $12,905 to $27,118 (210%) and from $9,526 to $15,719 (an increase of 165%) in the years of income ended 30 June 1980 to 1983 inclusive. Tax rose by $9,499; $9,869; $5,839; and $1,899. Additional tax for late lodgment calculated at compensatory rates of interest rose to $2,784; $1,621; and $295. Additional tax for incorrect returns amounted to $7,417; $7,706; $4,559; and $1,079 - a total of $20,761 of which $10,843 represented a culpability factor calculated at 40% of tax avoided.2.22 No reference to interest-bearing accounts appeared in any of the relevant income tax returns or in the balance sheets accompanying them. I am satisfied that the existence of those accounts was not made known to the instructing accountants. (I note that in the course of the hearing it was conceded by the Commissioner that had the accountant given evidence, it would have been to the effect "I received a phone call from (W) just prior to the lodgment of her 1983 income tax return. She asked whether her 1983 income tax return was complete and I assured her that all the information provided by her had been taken into account and that as far as I was concerned it was correct according to the instructions I had received". That statement was not disputed by the applicant.)
2.23 In mitigation one can point to the inexperience of W; the pressures of her business commitments which prevented her from attending to the discharge of her tax responsibilities; the fact that she brought her existence as a taxpayer to the attention of the Commissioner when she filed returns; and the absence of any special artifices whereby to hide what had happened. On the other hand one can point to the failure of W at the outset to seek advice as to her tax responsibilities and as to the maintenance of accurate records for both business and tax purposes; the constant deferment of action to bring her affairs into order; the frequency of her actions in depositing takings direct to interest-bearing accounts; the failure to disclose the existence of those accounts to her accountants, accentuated in the failure to disclose the interest from them and disclose the nature of the deposits to those accounts; her failure to recognise that the interest was not included in the income tax returns prepared on her behalf; her failure to note that the balance sheets annexed to those returns did not refer to any of those interest-bearing accounts, notwithstanding that the level of deposits at close of year was rising from $3,589 (1980) to $23,331 (1981) to $47,927 (1982) and to $33,611 in 1983; the fact that, as the operator of a one-person business, she was alert to matters such as profit-margins on various items and the differences between them and as to the daily levels of her turnover; and, as I am satisfied and find, that she was aware throughout the period that she was prospering to an extent substantially in excess of the levels of income returned by her.
2.24 In so far as liability has arisen to penalties for late returns and to a compensatory interest component for sec. 226 purposes, W has only herself to blame. She accepts that. What is really at issue is whether in all the circumstances the imposed culpability factor of 40% (amounting to $10,843) is appropriate. Of all seven cases under consideration, clearly this is the one in which, by reason of delay in presentation of returns and understatement of
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income in those returns when presented, the Commonwealth has been deprived in greater amount and over a longer period than in other cases of the use of revenue which it should have received. Penalties for late return and by way of compensatory interest are appropriate to deal with that. Further, clearly the magnitude of the understatement in absolute terms is far greater than in any of the other cases, but that is a factor which will be adequately reflected by application of the appropriate percentage factor to the underpaid tax, whatever the percentage may be. I also observe that the quantum of the understatement as a percentage of final taxable income in each case substantially exceeded the percentage understatement in any other case. (For W the percentage understatement exceeded 66% in 1980 and 69% in 1981. Among the others, only M exceeded 65% with 69% in 1982. A came next at 30% in 1984.)
N - The scallop-splitter
2.25 N is a scallop-splitter. Earlier she was employed as a waitress. She was born in 1960. During the material period, which embraces the years of income ended 30 June 1982 to 1984 (inclusive), she resided in a small coastal township. She married in February 1983 but at all material times prior to that date she had lived with her husband in a de facto relationship. A child was born of that association.
2.26 Throughout most of the period under review the husband was unemployed and he was able to devote his efforts to the construction of their residence. In her returns of income for those years the only sources of income disclosed by N were from employment and social service benefits. From the date of her marriage she claimed her husband as dependent on her, but having a separate net income of $720 (1983) and $1,877 (1984). She did not disclose the existence of any jointly-held interest-bearing accounts or acknowledge any entitlement in her own right to interest derived from those accounts. Following investigations by the Commissioner amended assessments issued to bring to account one-half of jointly derived interest; to increase her taxable income by amounts of $613, $1,173 and $768; to adjust spouse rebate accordingly; and to levy additional tax ($199; $339; $295).
2.27 N objected to the assessments of additional tax and in doing so relied on the following grounds: "I lodged my own income tax return (i.e. not prepared by a tax agent); I was supporting a dependent spouse de facto until 19 February 1983; I believe that the interest was not assessable to me; and I made a genuine mistake in interfacting [sic] the law." In later correspondence and in evidence, she stated that she considered the bank interest to be income of her husband which was not liable to tax because his income level was below the "threshold", although she could not explain why she should have thought it to have been his income rather than hers or, more appropriately, theirs. I am not persuaded that the explanation offered is accurate, although she has probably convinced herself that it is true.
2.28 In the lead-up to the issue of the assessments the Commissioner had established the existence of interest-bearing accounts in the joint names of N and her husband. In August 1983 he called on N for completion of a questionnaire in which the question was stated as: "With regard to your claim for dependent spouse rebate please advise the total amount of your spouse's net income for the period 1982 to the period 30 June 1983." N promptly answered stating "no income earn [sic] during this period". In October 1984 the Commissioner wrote to N stating "information held in this office suggests that income derived by you from investments may not be fully accounted for in your return of income for the year ended 30 June 1982". The letter went on to request re-examination of records; the provision of details of all income derived; and warned as to "the imposition of substantial penalties for the omission of income from returns". The form of questionnaire was returned referring to only one account - in the name only of N - which disclosed income derivation at $4 and $13 in the years of income ended 30 June 1982 and 1983 respectively. I observe that nothing in the letter or in the form of questionnaire directed attention to jointly-held accounts. In returning that form, N by covering letter stated "as my income has been well below the basic wage, I did not deem it necessary to include this information in my taxation form". One of the Commissioner's officers gave evidence that in January 1985 he had spoken with N by telephone advising that the information supplied did not match information available to the Commissioner in that some building society accounts had not
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been mentioned. He requested information on all accounts, sole and joint. As to "separate net income", his evidence was that when told that only the husband's "wages" had been taken into account he explained the concept of assessable income; that half the interest would be assessable to each of them; and that the interest attributable to the husband should be included in "separate net income". In raising the assessments the perceived unco-operative attitude of N was seen to justify calculating the culpability rate of penalty at 50%.2.29 I am particularly troubled by the calculations forwarded to the Registry as giving effect to that decision. On my calculations the tax avoided by N was as follows:
- (a) for 1982 - $196.16 ($1,635.52 less $1,439.36);
- (b) for 1983 - $349.76 ($1,800.94 less $1,441.18); and
- (c) for 1984 - $233.59 ($1,915.85 less $1,682.26);
and yet
- (d) figures supplied to the Registry after the hearing indicate that the culpability factor was calculated at 50% of tax avoided at $198.38 for 1983 and $212.29 for 1984; and
- (e) despite the fact that total omissions only amounted to $779.51, on 27 September 1985 by a letter attending notice of disallowance of the objections after they had been "fully considered", the Commissioner asserted that:
- "The additional tax to which you thus automatically became liable in this instance was $3,339.08. In the preparation of your amended assessment, however, this amount was reduced in the circumstances to $834.77."
R - The truckdriver
2.30 R was a married man, born in 1946. His wife of 17 years had not been employed during the marriage but, as wife and mother, had managed the household. R had worked for a living from the age of 17 years. For about five years embracing the years 1980-1983 he held a steady job driving a heavy-rigid log-truck for one employer. He was employed at a set wage - it varied from time to time - and his daily task was to deliver two loads of sawlog or pulpwood. His employer was regulated by quota as to the amount of pulpwood to be delivered from time to time but, subject to that, the taxpayer was often able to work additional hours to deliver a third load. Each week he received payment for the work of the week by cheque. That was taken to his wife and she cashed it next day to fund the week's provisions for the family. He knew that tax was deducted from his base wage and that that was recorded. He also knew from week to week how much he was entitled to receive by way of payment for extra loads delivered. His belief was that his employer was doing whatever needed to be done in relation to additional earnings to cover tax although nothing was shown on the weekly pay slips to indicate that any tax had been deducted from the latter amount. (His evidence in that regard is somewhat confused and quite open to criticism by those with greater aptitude to understand tax matters than R.) I am not persuaded that the extra amounts represented net earnings after tax. At the close of each financial year he received a group certificate from his employer recording gross salary of $11,560, $12,360, $13,000 and $13,000 for the years ended 30 June 1980 to 1983 respectively. Instalments deducted were shown as $2,049.30, $2,226.35, $2,423.20 and $1,841.67. He presented that certificate to his wife who prepared in very simple form income tax returns disclosing only those amounts. There was no other assessable income, from investments or otherwise.
2.31 In 1984 an investigation of the records of the employer showed that, in addition to the foregoing amounts, R had received further remuneration amounting to $1,769, $4,896 $5,226 and $4,380. Amended assessments issued assessing R for further tax and to liability for additional tax in sums of $530, $1,284, $1,257 and $732. The culpability rate was 40%. The understatement of income was a quite substantial proportion of the taxable income finally assessed - but never quite so high as 29%. It was put to the taxpayer during cross-examination, and later put in the course of argument, that the magnitude of the understatement was such that it must have been obvious to him when he received his group certificates that the information was incorrect. In his case I reject that argument. He was not a well-educated man and his proficiency in literacy and numeracy was quite limited. I have no doubt that, like vast numbers of workers
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employed on wages, he was not only employed by the week and paid by the week, but he lived from week to week by those earnings and week by week he made sure that he received what he understood himself to be entitled to. Even so he was probably more dependent on his employer's honesty over a year than he would have thought. (The fact of understatement of income is not in issue. However, it may be that the only basis for R accepting the allegation of an understatement is that he has assumed that the wages records of his deceased employer are accurate. It is possible that they are not.) I do not accept that he even tried to verify the tax deductions shown on his group certificate with the fifty or so pay-slips recording amounts of tax deducted week by week. He did not enjoy the skills of clerical workers secure in tenured positions who can measure their career advancement by reference to annual salaries. The insecurity of his position was illustrated by the manner of termination of his employment. On returning with the log-truck to base one evening he was told that the truck had been sold and that his employment was terminated, with immediate effect. Faced with the ongoing responsibility of providing for his family, he raised enough money to acquire a truck and commenced business on his own account taking up the uncertain, seasonal occupation of firewood-gatherer and merchant. In that undertaking all responsibility for handling the business side of affairs - such as it is - rests with Mrs R.2.32 The employer was not called as a witness as he had died prior to the hearing. That being so, it was not possible for either the applicant or the Commissioner to lend support to their contentions by reliance upon his evidence. It may be that the evidence of the employer would have established that R had requested the employer to account for the gross entitlement without deduction of tax, or at least knew that he was being paid the gross figure. It may be that the evidence would have established that the employer was content to leave R with the impression that the employer would deduct tax and remit it to the Commissioner but without any intention of doing so, so that the net expense to the employer of R's efforts might be reduced. In the circumstances it would not be proper to make any such finding, although I note that the estate of the employer could have been held liable to account to the Commissioner for the tax the deceased should have deducted (sec. 221N). I content myself by finding that R was party to some arrangement which he did not fully understand but under which he knew, or ought to have known, that something unusual and, therefore, possibly irregular was going on, but that he did not know or understand that the representations contained in the group certificate were inaccurate.
2.33 Unquestionably there are some respects in which the default of R can be likened to the default by M, the real estate salesman. In both cases their remuneration came in two parts; tax was deducted from only one part; tax should have been deducted from the other; and tax was not deducted from that other. However, there is a major difference. By reason of his greater sophistication in commercial matters M should have been much more aware - and in my view was - that the group certificates did not account for his gross remuneration. Despite the fact that M was much younger than R, M already enjoyed advantages of learning and experience which the passage of the years was unlikely to rectify for R. To that extent R is less culpable than M.
K - The husband
2.34 K was a hotel manager who throughout the year of income ended 30 June 1982 resided with his wife and their infant child, born 25 November 1980. To the best of K's knowledge during that year of income ended 30 June 1982 his wife had not engaged in any income-producing activity. Prior to the birth of their child she had been employed for some years by a major company, but she had left their service prior to the birth. At the time she ceased work K thought that a payment, probably for long service leave, would be forthcoming, but if it did it was never mentioned to him. Unhappily the marital relationship deteriorated and Mrs K left the matrimonial home in November 1983.
2.35 In March 1983, at a time when the matrimonial relationship was less happy than it might have been, K had a tax agent prepare his income tax return to 30 June 1982. In that return he represented that his spouse had been resident with him and dependent on him for the full year and, accordingly, claimed the maximum allowable spouse rebate of $830. He believed the statement so made was true. He
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admitted in evidence that at the time of preparing the return he did not ask his wife whether she had had an "income" - whatever either of them might have understood by that - during that year, but he said - and I accept it - that had he known that she had had an income he would have disclosed it. (I think that it is idle to speculate whether she would have truthfully answered his question had he thought to ask it at the time.) By notice of 27 February 1985 the Commissioner issued an amended assessment against the taxpayer in which he reduced the rebates of $989 previously allowed. (Due to an error reference to the allowance of the rebate was inadvertently omitted from the copy notice of assessment prepared by the Commissioner and lodged with the Tribunal.) The spouse rebate was reduced by $591 to $398. The adjustment sheet explained "SPOUSE REBATE - adjusted in view of spouse's separate net income". Additional tax was levied at $420. The culpability factor was 40%.2.36 Upon receiving the assessment K went to see his wife to ask her "what it was about" but she refused to discuss the matter with him. He then contacted her former employers, but they too refused to disclose any information to him. So it was that, when the matter came before this Tribunal for hearing, the only reasons K had for believing that his wife had had a separate income were the fact that the Commissioner had asserted so; and that he acknowledged the possibility that that might have been so by reason of payments during the year of income to his wife by her former employer. On the other hand he could not venture any explanation as to why the payment of entitlements such as long service leave - assuming them to be so - should have been so long delayed.
3. Part VII - Penal provisions and prosecutions
3.1 The obligation to pay additional tax in the circumstances of the applicants arose pursuant to sec. 226 of the Income Tax Assessment Act. Until its repeal sec. 226 was one of many provisions set forth in Pt VII of the Act: "Penal Provisions and Prosecutions". The provisions fall into three groups.
3.2 One group of provisions provided for fines, and in one instance imprisonment, following conviction before a court. Section 223 constituted it an offence to fail to duly furnish any return or information or comply with any requirement of the Commissioner (maximum penalty $200). Section 224 made it an offence to refuse or neglect to duly attend and give evidence when required or to truly and fully answer questions put or to produce any book or paper required by the Commissioner without just cause or excuse (maximum penalty $200). Section 225 constituted it an offence to fail to comply with any court order under the last two preceding sections (maximum penalty $1,000). Section 228 constituted it an offence for an agent to fail to sign a certificate when he should or to sign a certificate which is false (maximum penalty $200). Section 229 constituted an offence of perjury, punishable by up to four years' imprisonment.
3.3 A second group of sections conferred additional power. Section 227 made it an offence to make a false return or give a false answer to a question duly put (maximum penalty $200); section 230 made it an offence to "knowingly and wilfully" understate income or make a mistake affecting liability to tax (maximum penalty $1,000); section 231 made it an offence for any person "by any wilful act, default or neglect, or by any fraud, art or contrivance whatever, [to avoid or attempt to avoid] assessment or taxation" (maximum penalty $1,000). In each of those cases "in addition, the Court may order the person to pay to the Commissioner a sum not exceeding double the amount of tax that has been avoided or attempted to be avoided".
3.4 Section 226 stood apart from those sections. It provided as follows:
"(1)...
(2) Any taxpayer who -
- (a) omits from his return any assessable income;
- (b) includes in his return as a deduction for, or as a rebate in respect of, expenditure incurred by him an amount in excess of the expenditure actually incurred by him;
- (c) in his return, whether furnished before or after the commencement of this sub-section, claims to be entitled to a rebate of tax in respect of recouped expenditure; or
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- (d) in relation to a claim to be entitled to a rebate under section 23AB, 79A, 79B, 159J, 159K or 159L, includes in his return information that is false in any particular,
shall be liable to pay as additional tax an amount equal to double the difference between the tax properly payable by him and the tax that would be payable if it were assessed upon the basis of the return furnished by him, or the amount of $2, whichever is the greater.
...
(3) The Commissioner may in any case, for reasons which he thinks sufficient, and either before or after making any assessment, remit the additional tax or any part thereof.
(4) If in any case in which a taxpayer is liable to pay additional tax under this section a taxation prosecution is instituted in respect of the same subject matter, the additional tax shall not be payable unless and until the prosecution is withdrawn.
..."
3.5 Section 226 differed from all the other sections mentioned in that its operation did not depend upon a prosecution to conviction before a court. Nor was proof beyond reasonable doubt a prerequisite. The Commissioner determined the amount of liability. That circumstance also commonly meant that the taxpayer, as the person to be subjected to the penalty of additional tax, had no opportunity to be heard in mitigation before liability to the additional tax was imposed by an assessment. That being so, it commonly happened that penalties were initially fixed at amounts perceived to be appropriate to circumstances where there were no, or no adequately appreciated, mitigating factors. That circumstance may have remained unchanged even after any objection on the part of the taxpayer had been reviewed (sec. 186). In all of these cases the Commissioner has adhered to his original determination.
3.6 In considering sec. 226 the Commissioner points to subsec. (2) as indicating how seriously the Parliament regards the underpayment of tax, and argues as if justice required the 200% penalty, and as if resort to subsec. (3) is by way of some merciful relief from obligations duly imposed, rather than an exercise in justice. On the other hand, applicants point to subsec. (3) as indicating an intention on the part of Parliament that the additional tax to be levied should be that sum which is the most appropriate amount based upon a scale in which 200% of tax avoided is the maximum impost: an impost which can only be exceeded in all by $1,000 if the taxpayer is convicted before a court for having made a false return or given a false answer (sec. 227); "knowingly and wilfully understates the amount of any income" (sec. 230) or "by any wilful act, default or neglect, or by any fraud, art or contrivance whatever" has sought to avoid taxation (sec. 231).
3.7 Conversely, it must be noted that this Tribunal has no power to review the exercise of discretion by the Commissioner pursuant to sec. 226 if the additional tax imposed is less than a compensatory factor. (More precisely, less than the greater of $2 or an amount calculated in respect of the period commencing on the last day allowed for furnishing the return and ending on the day upon which the assessment in respect of the omitted income or excessive deduction or rebate is made or the day upon which the assessment is made in which the rebate is wholly or partly disallowed, at the rate of 10% p.a.)
3.8 Further, by its terms sec. 226(2) operates whenever there has been an omission of income or overstatement of expenditure incurred, whether or not it leads to an under-assessment of income tax. My understanding is that additional tax is rarely levied if the original assessment issues in due course and at the time of assessment the error has been detected and under-assessment avoided. In those circumstances, whether they be rare or common, the Commissioner has exercised his discretion to wholly remit additional tax. When he does so no additional tax by way of a culpability factor is claimed, although the action of the taxpayer is no less culpable, simply because the "attempt" was ineffective.
3.9 There are also several other factors to be considered. If the avoidance of tax is effective for a period of ten years the application of the current compensatory rate of interest - 20% p.a. - leaves no scope for the imposition of additional tax by way of any culpability factor. Alternatively, if the omission was effective over five years the maximum applicable
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culpability factor is 100%. Further, when the Parliament in 1922 adopted the 200% limit the maximum marginal rate of tax was five shillings in the pound (25%). (State income tax was also leviable.) If the 200% penalty was imposed - as it was in those times - that meant that in all the taxpayer could forfeit as much as 75% of the omitted income to the public revenue. In more recent times the maximum marginal rate of tax has been 60% with the result that for every dollar of taxable income in relation to which tax has been avoided the maximum impost - including tax and additional tax (sec. 226(2)) - is 180% of that income. That no doubt explains why there is no record in recent times indicating that the Commissioner has levied additional tax at any rate close to 200% of tax avoided. (I cannot recall any imposition exceeding 100% of tax avoided, however I note the decision inCain (F.C. of T.) v. R.L. Smith 72 ATC 4251. The Supreme Court of Western Australia, upon conviction of the taxpayer pursuant to sec. 230 in each of three years, imposed a fine of $1,000 (the maximum) and in addition ordered the defendant to pay the Commissioner amounts by way of additional tax which, together with the fine, equalled 200% of the tax avoided. In that case it had been proved beyond a reasonable doubt that the taxpayer had "knowingly and wilfully" understated net income. His Honour described it "as a glaring case", saying that there was no circumstance "which would influence (him) to clemency". "On the principle that a maximum penalty is intended for a case of maximum gravity", he imposed the maximum fine in each year and the maximum in additional tax less only the amount of fine. None of the present applicants is deserving of the strictures expressed by his Honour in that decision.)
3.10 It is also to be recognised that, by the use of a percentage factor to measure additional tax, the Parliament made some provision to correlate the quantum of penalty to the quantum of omitted tax: the greater the tax avoided, the greater the penalty. Even so, the correlation is only complete if the interval of time which passes between under-assessment and amended assessment is not brought to account. With the current compensatory rate of 20% p.a., that is a matter of considerable significance.
4. Considerations as to remissions
4.1 In all cases where there has been an underpayment of tax, that result is due to human error. It may be personal error on the part of officers of the Commissioner - as has occurred in relation to some of these assessments - or on the part of the taxpayer or his representatives. Errors may be mathematical or typographical. The taxpayer may record an incorrect income figure ($11,500 in lieu of $15,100); or the Commissioner may issue an assessment understating, by as much as $15,000 in one recent case, the amount to be credited for PAYE instalments. Errors which cause an underpayment may be due to a misunderstanding of the law. If such an error occurs on the part of the Commissioner it will remain unrectified because no amended assessment may issue except to correct an error in calculation or a mistake of fact (sec. 170(3)). If an error was in calculation or as to a mistake of fact it may well remain uncorrected, even if it is identified. If there has been a full and true disclosure of all the material facts necessary for assessment, the amendment cannot be made after the expiration of three years from the date upon which the tax became due and payable under the erroneous assessment (sec. 170(3)). Even if there has not been a full and true disclosure, there is no power to amend after the expiration of six years unless the Commissioner is of opinion that the avoidance of tax was due to fraud or evasion (sec. 170(2)). It also needs to be borne in mind that errors do not only lead to underpayment of tax - sometimes the taxpayer overstates his income (Case R57 was an example -
84 ATC 430). On the other hand the Commissioner, when moving to disallow a claimed deduction, may deduct the amount in question from the income returned instead of adding it to that figure.
4.2 In indicating these matters it is not my purpose to propose that the Commissioner or his officers should be penalised for error, or to propose the taxpayer should have no liability for error. Rather it is only to record that no one is free from error at all times. At the same time it needs to be emphasised that in the case of a taxpayer's errors, whether committed personally or whether they are errors for which he is vicariously liable, the amount lost to the community is a gain to the taxpayer.
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"A heavy penalty"
4.3 As long ago as 1936 Evatt J., then a Judge of the High Court of Australia, said of the forerunner to sec. 226 - sec. 67 of the 1922 Assessment Act - that:
"The object of the section is to impose a heavy penalty so as to ensure the accuracy of returns, upon which the whole income tax system of the Commonwealth is based."
(
F.C. of T. v. Trautwein (1936) 56 C.L.R. 211 at p. 217.)
In my respectful view that statement remains in full force and effect 50 years later. However, to understand the import of the statement, it needs to be read in context.
4.4 The period of time with which his Honour was concerned spanned the years of income ended 30 June 1921 to 1927; income for the period was initially returned at less than £35,000 and assessed at slightly less than £48,000; the investigation continued over many years with the first amended assessment issuing in August 1925 and the last in November 1931; by the time the final amended assessments had issued the total income assessed was slightly less than £392,000 (later to be reduced to slightly more than £350,000); the matters did not come to trial until 1935 and then occupied twelve days before Evatt J. (cf. ibid. p. 196), a further three days before the Full Bench (cf. ibid. p. 63); were followed by a further three days before Evatt J. (cf. ibid. p. 196); and later two more days (ibid. p. 211). The reports are not completely clear on the matter but it does seem that it was not until July 1935 that the Commissioner issued a specially endorsed writ seeking to recover £325,652; by the time final judgment was sought in October 1936 the claim was reduced to approximately £287,000 made up of £84,423 income tax - approximately equal to 25% of the understated income, and that was when 25% was the maximum marginal rate of tax - and £202,591 additional tax. (State income tax was additional.) As additional tax pursuant to sec. 67 could not have more than doubled the tax on omitted income, it seems likely that the references in the report to "additional tax" include reference to additional tax for non-payment. After all by the date the specially endorsed writ issued the assessments had been on foot for periods ranging from four to ten years. (It is difficult to express the extent of the understatement by Trautwein in present-day values. However some indication can be given. If the understatements had been in the period immediately prior to 1948, and the Consumer Price Index (1948-1986) was an appropriate indicator, the understatement by Trautwein in today's terms would have exceeded $3,600,000.)
4.5 It should also be borne in mind that Evatt J. (at p. 199) described the activities of the taxpayer in the following terms:
"In the seven years' operations the taxpayer had had many and varied activities, involving the expenditure and receipt of money. He owned or controlled several hotel businesses where profit was derived in the main from the sale of liquor. He also became interested in acquiring and disposing of interests in hotel properties including hotel licences. He was also interested in the breeding and racing of racehorses and he had many transactions in betting both on his own horses and those of other persons. He controlled a number of bank accounts some of them in the names of relations. Those who had been preparing his returns of income for the information of the Commissioner would have had a difficult task to perform even if proper books of account had been regularly kept. As it was, the task of reconstruction was practically impossible."
Further, on the question of the credibility of the taxpayer as a witness, his Honour said (at p. 202):
"I cannot venture upon a wholesale condemnation of the appellant as a witness despite the invitation of learned counsel. But in many respects he was an unsatisfactory witness... Before me, his evidence necessarily occupied many days. At times his readiness both in assertion and denial seemed inconsistent with dishonesty and suggestive even of frankness. At others, his apparent frankness seemed to wear the aspect of a more subtle scheme of deception. Accordingly I have scrutinised his evidence with special care. Much of his evidence I have had to discard, not because I am positively satisfied that he was lying, but because I was left in doubt as to its truth or accuracy... Except where it is corroborated by other evidence or by the
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strength of cogency of the surrounding circumstances, I have not been able to place great reliance upon his testimony, particularly as it relates to such far off events and circumstances."
4.6 Although having so found, his Honour volunteered some further comments (at pp. 209-210), in particular about -
"one aspect of the present litigation which it is only fair to mention. The question whether a taxpayer should in justice be visited with the payment of additional tax is one upon which an appeal from the Commissioner's discretion lay, not to this court but to the board of review. But in considering whether the case was an appropriate one for the infliction of the maximum penalty, the commissioner was necessarily restricted by the facts as they then appeared to him and he had none of the assistance to be derived from such an investigation as had to be undertaken before me. Accordingly, if the matter of penalty is again raised either before the commissioner or a board, an important point may well be, not whether the profits of the taxpayer's business of racing and of hotel trafficking where profits derived from business for that question is answered against the taxpayer by my findings in this appeal; but whether the taxpayer, in omitting to include the amount of such profits in his return, acted in the belief that they at least were no part of his assessable income. It is not to be supposed for a moment that the aggregate profits of these businesses covered all the deficiencies of the return. But something is to be said for the view that the omission of betting gains was due to the taxpayer's misunderstanding of a provisional departmental ruling as to the question of betting and that the taxpayer may, as he asserts, have acted upon the once fairly widely accepted notion that profits from sale of property interests were not taxable as income. I should add also that my findings that the taxpayer carried on these activities by way of business is based upon a general conspectus of transactions which was not available either to the taxpayer or to the accountants who prepared his returns. No doubt there are other aspects of the situation which may be regarded as telling against the taxpayer's conduct, but I think that it is only fair to make the above observations."
In that passage his Honour asserted the relevance of an exercise of discretion in fixing penalty; the non-availability to the Commissioner of a full understanding of the facts such as can arise from a hearing; the state of belief of the taxpayer; and misunderstanding of tax law. His Honour remitted the question of penalty for further consideration.
Honest error
4.7 It is no answer to an assessment of additional tax pursuant to sec. 226(2) of the Act to contend that the error was honestly made. For liability to arise it is sufficient that income has been omitted or a rebate incorrectly claimed (cf.
F.C. of T. v. Turner 84 ATC 4161), but honesty is most material when it comes to determining the appropriate imposition of additional tax (cf. Trautwein's case - ante).
Multiple assessments
4.8 In a number of the cases under review understatements of income have occurred in more than one year and there have been as many impositions of additional tax as there were years of understatement. However, in none of the cases before me is it contended that the taxpayer had previously been assessed to additional tax for understatement of income only to thereafter again understate income. That being so, there was no basis for holding that there is any element of repetition which itself indicates a basis for greater culpability.
Alone or with others
4.9 It happens that in all seven of these references the taxpayer stands alone in his responsibility as a taxpayer, without being associated with other taxpayers. It is therefore unnecessary to consider what differences in penalty might be appropriate in a situation where, for example, two partners, perhaps husband and wife, are involved and their personal responsibility for the understatements is not equal.
The Commissioner's choice
4.10 The exercise of correctly levying income tax according to the directions of the Parliament is an idle exercise unless the Commissioner can collect the tax assessed. Even delay in collection can cause serious liquidity problems to the detriment of the
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common weal. That being so, in the development of our income taxation system, legislation has increasingly cast on those paying money to persons prospectively liable as taxpayers an obligation to deduct from the moneys to be paid a sum on account of tax and to remit it to the Commissioner to the credit of the payee. The "pay-as-you-earn" system which obliges employers to make deductions from all salary and wages - widely defined - is an effective and efficient means overall of ensuring that by the time any assessment issues against an employee, the Commissioner will already hold a sum sufficient, or nearly sufficient and sometimes far more than is sufficient, to satisfy the taxpayer's tax obligations. It is not always so. Sometimes employers do not deduct when they should and their payees do not disclose to the Commissioner the income they have received or their liability to pay tax on it. That may be deliberate, or occasioned by rashness or caused by neglect and misunderstanding on the part of either employer or employee. But whatever the cause both employer and employee continue to be liable, the employee because of the general provisions of the Act; the employer because of the specific provisions of sec. 221N.4.11 So it was that when the Commissioner discovered that, in the case of M, a substantial organisation - a company listed on the public stock exchanges - had failed to deduct moneys on account of tax from the commission due to M; and when he discovered that a logging contractor (now deceased) had failed to deduct amounts on account of tax from a truckdriver (R), the Commissioner became entitled to recover from the employers. Further, he became entitled to recover those moneys on the basis of the amounts which should have been deducted week by week rather than only on the basis of the additional tax payable by the payee by reason of the relevant increase in his income. To that extent the Commissioner had a choice. If the employer had carried out his statutory duty, at no direct cost to himself, there would have been no under-assessment, no risk of non-payment, and no need for any other penalties. If the Commissioner had chosen to recover from the employer, any residual issue between employer and employee could have been resolved between them pursuant to sec. 221N, without anything more than the application of principles of compensation. Why in this case the Commissioner chose to assess and penalise employees rather than claim against the employers was not explained. It is fair to say that neither M nor R stood alone in their responsibility. They shared it with their employers - statutory "agents" of the Commissioner. However, that circumstance does not automatically absolve either M or R from responsibility.
Retention of a tax agent
4.12 It has been held that it is no answer to liability to additional tax to attribute responsibility for the understatement entirely to a registered tax agent or anyone else. The responsibility for accuracy in the assessment of income tax is personal to each taxpayer. If the understatement is occasioned by the negligence of a tax agent, then he will be liable in damages to his client and, if there is no contributory negligence on the part of the client, that will be on an indemnification basis. The fact of that common law liability is confirmed by sec. 251M of the Act which provides:
"(1) If, through the negligence of a registered tax agent, or of a person exempted under section 251L, a taxpayer becomes liable to pay a fine or other penalty or any additional tax, the registered tax agent, or the person, as the case may be, shall be liable to pay to the taxpayer the amount of that fine or other penalty or additional tax, and that amount may be sued for and recovered by the taxpayer in any court of competent jurisdiction.
(2) Nothing in this section shall exonerate the taxpayer from his liability."
4.13 In the case of the colonial pensioner (post) the error was entirely that of the tax agent and it is to the credit of that firm that they accepted their responsibilities in the matter immediately and volunteered to assume the burden of the additional tax levied against the taxpayer. (Of course, in so far as they compensated for the total of additional tax assessed without bringing to account the value to their client of the use of the moneys during the period they were withheld from the Commonwealth, they in fact over-compensated.) It was suggested in the interests of those tax agents that the imposition of additional tax in the particular case was an unjust imposition on them. Conversely, it was contended on behalf of the Commissioner that
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the imposition could not be said to be excessive against the taxpayer because he had been indemnified, and always was entitled to be indemnified, by his tax agents. (It might as well have been said that the entitlement to an indemnity merited increased penalties, because the tax agents would be able to claim a tax deduction for their loss.) I reject such contentions. Additional tax is a penalty imposed against the taxpayer. It is a penalty for his failure to ensure that his return of income was correctly made. He is responsible for the understatement even though it is occasioned by others who may be members of family, or professional persons, or persons entrusted by the courts with responsibility for the affairs of a taxpayer under disability. Moreover, the taxpayer is the person who may one day come to be penalised again and then be penalised more severely because of the earlier imposition. In my view it is irrelevant that a taxpayer had the good fortune to deal with honourable accountants who voluntarily assumed responsibility for their errors, just as it would be irrelevant if a taxpayer were dealing unknowingly with a firm not fit to be in practice.4.14 That is not to say that the action of the taxpayer in incurring the expense of having his income tax return prepared by qualified tax agents is altogether irrelevant. I have no doubt that the task of assessing returns is made much easier for the Commissioner when they are prepared by registered tax agents, particularly if they are also competent and honourable. (Cf. the difficulties experienced with M, who prepared his own returns. Factors unrelated to the issues before me occasioned three amended assessments for 1981 and contributed to a fourth.) If returns are prepared by tax agents the Commissioner can ordinarily assume that returns will be presented to him so as to reflect a common understanding of entitlements and responsibilities, which returns will record accurately the instructions of the taxpayer. (That says nothing about whether the instructions given by the taxpayer were accurate - cf. the storekeeper.) That that is so is reflected in the circumstance that the "private" expense of having income tax returns prepared by registered tax agents has been made deductible by sec. 69 of the Act. Further, in the unhappy circumstance that a tax agent is not fit to be in practice, he can have his registration cancelled (sec. 251K(2)) - a severe penalty which must reinforce in agents a desire not to be identified as either incompetent or dishonest.
4.15 I am of the view that where a taxpayer has retained the services of a tax agent and the only error to be personally attributed to the taxpayer is failure on his part to identify and correct an error made by his tax agent, then that is a factor to be taken into account in mitigation of penalty. On the other hand, the fact of such a retainer is not a mitigating factor when the taxpayer is himself the source of the errors which are reproduced by the agent on the instructions of his client.
Complexity of the issues
4.16 Some matters in relation to tax are more difficult to understand than others. For example, it is hard to understand why all employees in the community should be expected to know that in some circumstances to buy shares in the company which employs them may create a liability to income tax. That would have been relevant to the situation of F - the employee shareholder - if it had not been for the circumstance that he received notice from his employer warning him of his income tax liability. As appears from the passages quoted earlier from Trautwein's case, such problems of understanding are matters to be taken into account in mitigation.
Qualifications of the taxpayer
4.17 Regard, too, needs to be had to relevant personal attributes and characteristics of the taxpayer. If a taxpayer is learned in matters of accountancy and tax law or has substantial commercial experience, his culpability in relation to his own taxation affairs is greater than that of a person substantially lacking in the skills of literacy and numeracy and awareness as to income tax law and financial techniques - the truckdriver is an example. On the other hand, some issues are sufficiently simple so that no special qualifications are needed to understand them. Understatement of the gross takings of a business by setting moneys aside so that they are not disclosed in ordinary business bankings is an example. Non-disclosure of interest from investments is another.
Co-operation
4.18 Lack of co-operation in the course of an investigation is a factor relied on by the
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Commissioner as warranting increased penalties. I accept non co-operation as relevant, but its significance will vary according to circumstances. There was no suggestion here of destruction of records; of procuring false records or testimony; or of attempting to deter officers by threats or to corrupt them by bribery. In many cases such as these there is no opportunity to demonstrate co-operation - the colonial pensioner, for example - and even vehement protests against the Commissioner's proposed actions pending assessment are not necessarily signs of non co-operation. In other cases it is the method of investigation chosen by the Commissioner which occasions apparent "non-co-operation". The case of the scallop-splitter provides an example. She was asked about undisclosed income already known to the Commissioner, but the questions were so framed as to assume that a person such as she would recognise that the questions related just as much to income jointly derived as to income derived solely. Had she been asked why she had not disclosed her share of jointly derived income from identified accounts, the result might have been quite different. Had she been assessed without being asked, there could have been no assertion of non co-operation.
Late return or incorrect return?
4.19 In assessing what additional tax is appropriate in relation to an incorrect return (sec. 226(2)) it is appropriate to bear in mind what the Act provides in relation to "late returns". The distinction is illustrated in the case of W - the shopkeeper. She became liable to penalties for late returns as well as incorrect returns. Initially sec. 226(1) created a liability to "late return" additional tax in relation to a period when W acknowledged no liability to pay any income tax. Section 226(2) - additional tax for incorrect return - applied in relation to incorrect returns whereby she acknowledged some liability to pay income tax, but for less than the full amount. Although the former conduct might be thought to be the more culpable, the maximum additional tax under sec. 226(1) was limited to 100% of tax avoided - cf. 200% of the tax avoided under sec. 226(2) - and in relation to both the original and amended assessments only a compensatory factor was brought to account as additional tax pursuant to sec. 226(1).
Quantum of omissions: Rates of tax: Rates of penalty
4.20 Consideration of the table as set forth in para. 1.9 shows that, even in unremarkable cases of understatement of income such as these, penalties can operate severely. Including penalties for late return, they amount in the case of the lady shopkeeper to $25,461. In the year of income ended 30 June 1980 she initially avoided being taxed on $21,905 but, assuming that the assessments are wholly upheld, she will lose $19,700 of that - in all 90% - to the revenue in income tax and in additional taxes for late return and understatement of income. (It might have been $31,281, or 123% of omitted income; or 97% of total income for that year.) Penalties fall more heavily on those liable to pay higher marginal rates of tax and, by the standards commonly applied, the amount ultimately payable will be increased the longer the period to elapse between omission and assessment. A significant factor is the rate chosen to reflect culpability, but the most effective factor is the quantum of omitted income.
4.21 I have considered whether the greater magnitude of omissions should itself be a reason for imposing lower penalties. That accords with practices of the law commonly applied in some other circumstances. A person sentenced to 12 months' imprisonment for theft is not ordinarily sentenced to a further nine years of imprisonment to be served cumulatively if, following his first conviction, he is convicted of nine other such thefts. But against that, in this field we are concerned only with money - not liberty; a correlation between financial advantage improperly obtained and financial penalty for the impropriety is not inherently unreasonable; and the Parliament has already provided something in the way of such proportionality in nominating a maximum of 200%. For myself I find nothing unreasonable in the thought that if two taxpayers liable to pay tax at the maximum marginal rate over the same period avoid liability to tax by understating their incomes, and one avoids liability in relation to $1,000 and the other avoids liability in relation to $100,000, that the penalties for the latter should be 100 times greater than for the former.
4.22 I have concluded that selection of an appropriate culpability factor expressed in
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percentage terms should not be influenced by the quantum of omissions.
What was omitted and why?
4.23 In six of the seven cases before me the under-assessment of tax arose because assessable income had been understated. In the other case a rebate had been overclaimed. The first six cases can be divided into three broad groups. The first group comprises F - the employee shareholder - and A - the colonial pensioner. There was no doubt that assessable income had been derived in the mind of any person concerned and no conscious attempt to conceal the fact of that assessable income from the Commissioner. In both cases the problem arose because of a failure or inadequacy in performance by the tax agent responsible for the terms of communication to the Commissioner. M - the salesman - and R - the truckdriver - comprise the second group. The common element in their cases was failure to disclose additional income from an employer who provided a group certificate dealing with only portion of each taxpayer's earnings. In both cases the employer failed to discharge its statutory obligation to act in protection of the Revenue, and thereby of the employee, by deducting tax and remitting it to the Commissioner. In the case of M it is of particular significance that the employer was a major, publicly listed company.
4.24 W - the shopkeeper - and N - the scallop-splitter - are appropriately considered together as the third group, notwithstanding the fact that, while W was the largest avoider over the longest period, N was one of the least of the avoiders as to quantum. Both withheld all information from the Commissioner as to their earnings from a secondary source - income from investments. In neither case was there merely an error of calculation or a typographical error. Neither of them can point to action or inaction on the part of any other person as contributing to the understatements. Further, having wholly omitted interest income, it is hardly open to suggest - and it was not suggested - that there had been some inadvertent omission of some only of several accounts or that there had been an error in calculation or a typographical error in recording interest accurately calculated. Further, as to N, the magnitude of the omission as a percentage of taxable income and having regard to the overall revenues of the household weighs heavily against any finding that the omission was in any way accidental. In addition W failed to account for a large part of the income derived from her principal source of earnings - trading. Clearly the most striking differences between the circumstances of W and those of N lie in the amounts of tax avoided; the levels of taxable income as finally assessed; and the duration of the period during which the Commonwealth was denied the tax due to it. Those factors are largely taken into account by the compensatory interest factor in the Commissioner's calculation, and substantially explain the sum levied as they do for all taxpayers.
4.25 Between the groups "culpability" differs substantially with W and N being the most culpable; A and F the least culpable; and with M and R in between, but with significant differences between them.
Financial hardship
4.26 I have considered whether financial hardship to the applicant may be a relevant factor to be taken into account in determining what additional tax for incorrect return is appropriate. The Act already makes express provision for that circumstance. Section 265 provides that a Board "consisting of the Commissioner, the Secretary to the Department of Finance and the Comptroller-General of Customs" or their appointed substitutes -
- "may release the taxpayer or the trustee of the estate of the deceased person (as the case may be) wholly or in part from his liability"... if "(a) a taxpayer has suffered such a loss or is in such circumstances; or (b) owing to the death of a person, who, if he had lived, would have been liable to pay tax, the dependants of that person are in such circumstances, that the exaction of the full amount of tax will entail serious hardship."
In addition the Federal Treasurer may, and sometimes does, authorise public funds to be applied in satisfaction of tax correctly assessed in circumstances where it is hard to imagine "serious hardship". As sec. 265 allows the question of hardship to be addressed having regard to the totality of the applicant's circumstances; and as, after consideration of all the circumstances of an applicant, even the imposition of severe penalties in relation to the income of a particular year may not be thought
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to occasion financial hardship, I have concluded that financial hardship is not a matter to be considered in relation to the review of additional tax imposed in relation to any particular year.5. The range of discretion
Maximum penalties: Commissioner's Guidelines
5.1 The Commissioner has published "Guidelines" in the form of Income Tax Rulings. They record directions to his staff as to the manner in which they are to assist him in the discharge of his responsibilities under the Act. They emphasise the importance of the provision in sec. 226(2) for 200% of tax avoided as a penalty. Such Guidelines are published for the information of the community and, particularly when published, come to form part of the total social and legal environment in which this Tribunal operates. Although they are not, and do not purport to be, authoritative statements as to the law which the Tribunal is bound to apply, they are not wholly irrelevant to the exercise of this Tribunal's discretion. The legal system does not operate in vacuo. If, despite strict enforcement, a particular type of offence is prevalent in the community, penalties upon conviction for that offence will tend to increase in severity. Conversely, if an offender is convicted of a rarely prosecuted, but frequently committed, offence some leniency is usually exercised. Further, if with the passage of the years society's perception of the gravity of a particular type of offence or of the appropriateness of a particular type of penalty has changed, those changed perceptions will usually be reflected in the determinations of the courts.
5.2 As I read Income Tax Ruling 2012 (published 25 January 1983 with effect from 14 February 1983), the norm for determination of additional tax pursuant to sec. 226(3) is that the amount levied is to comprise:
"a basic penalty of -
- 10% per annum of the tax avoided for the period up to and including 13 February 1983 and 20% per annum thereafter; plus 40% of the tax avoided
subject to increase by a further percentage of the tax avoided... depending on the seriousness of the offence, for each of the following circumstances that exists.
- (a) Deliberate steps have been taken, either before or after commencement of official enquiries, to conceal omitted income or support a false claim - 10% to 50%.
- (b) The above steps have involved corruption of employees or collusion - 10% to 50%.
- (c) There has been previous tax evasion by or on behalf of the taxpayer - 10% to 50%.
- (d) The degree of co-operation has been less than `reasonable' or such as to cause excessive delay in the completion of the official enquiries, and/or there has been positive obstruction - 10% to 50%.
- (e) There is other tax evasion, not subject to additional tax under sec. 226(2), by or on behalf of the taxpayer - 10% to 50%."
It is of course acknowledged in the Ruling that despite the references to penalties being increased by as much as 50% by reason of as many as six aggravating factors, the total penalties, including a compensatory interest factor and the basic culpability factor of 40%, may not exceed 200% of tax avoided.
5.3 That being so, it would appear that no matter how well planned and executed, no matter how deliberate or flagrant the course of conduct giving rise to the under-assessment of income, and no matter how personally culpable the offending taxpayer may have been, so long as he has avoided the aggravating factors specified, the "maximum" penalty to be expected of him by way of a culpability factor will be 40% of tax avoided, just as it will be for those - such as all the applicants before me - who are less culpable. I do not accept that as being reasonable; but if the "maximum" is 40%, that becomes an important factor in assessing the penalties to be exacted of each of the applicants whose causes now fall for consideration.
Minimum penalties: The Act
5.4 Section 193(2) (ante) used to provide that there was no power to review the Commissioner's determination to impose penalties unless the penalties imposed exceeded an amount determined by a compensatory rate of interest (10% p.a. to December 1984 - now 20% p.a.). It is arguable that the power to
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review which is exercisable when greater penalties have been imposed should not be exercised so as to reduce penalties further than that, even though the failure to assess correctly or promptly may be in part, and even largely, due to the Commissioner. I think such a view is an unnecessarily narrow one and I take the view that, where there is power to review any penalties which have been imposed, there is no jurisdictional limit to the reduction in penalties which this Tribunal may effect.
Minimum penalties: The Commissioner's Guidelines
5.5 The Commissioner's Guidelines (ante) propose that in the case of "voluntary disclosure" the culpability factor to be imposed over and above the compensation factor should normally be 25%. The existence of the term "voluntary disclosure" presupposes that persons who have understated income are aware of the understatement. That can only be so if they were conscious of the understatement when it was made - an aggravating factor when it comes to penalties - or came to be aware of the understatement at a later date. As to the former, I am not persuaded that any of the present applicants were conscious of the understatement at the time the returns were made, although some of them should have been so. As to awareness arising later, I think that most unlikely and quite exceptional. Few persons spend time reflecting on the accuracy of past assessments of income tax.
5.6 I have already held that a 40% culpability factor should not be the norm for both the least and worst of offenders aggravating factors apart. It is too crude a measure (cf. Dr Gerber in Case T18,
86 ATC 206). Further, I am of the view that even if a 40% culpability factor is an appropriate norm to be applied in relation to any "involuntary disclosure" - meaning discovery by the Commissioner - then, in my view, 25% can be too harsh a penalty to be applied for "voluntary disclosure". (It might be an interesting bicentennial project to declare a period of tax amnesty in which persons would be offered the opportunity to make voluntary disclosures without risking liability for any culpability factor. Income, which might otherwise remain forever undetected, may come to light and be taxed.) For that reason, I do not accept that in these cases, where there has not been any "voluntary disclosure", the culpability factor ought not be less than 25% of tax avoided.
Deterrence
5.7 The "principle" of deterrence has long been known to the law. Unfortunately, although frequently referred to, often little thought is given to its significance or as to the circumstances which make its application appropriate. In its application it may be particular - to dissuade the offender under consideration from repeating his offence - or general - directed to dissuading others from committing offences such as the offence which attracts the penalty for the individual who is to suffer it. In the circumstances of all the applicants before me, I am of the view that no substantial culpability factor will need to be applied to ensure that these applicants do not offend again. I am not persuaded that, if a tax agent had brought the matter of the understatement to the attention of any applicant before the due date for lodgment of his return and had adverted to the possibility of later investigation and the imposition of any penalty, that any of these applicants would have requested the tax agent to lodge an incorrect return, even if the tax agent had been willing to risk penalties for himself by doing so.
5.8 As to the matter of general deterrence, the first thing to do to ensure that it is in any way effective is to satisfy oneself that those to whom it is directed would recognise themselves as being at risk. (I find it hard to imagine that the widespread application of deterrent penalties in cases similar to those of K will have the effect of bringing to the consciousness of every married man about to claim a spouse rebate the possibility this his spouse may have earned substantial moneys constituting assessable income without his knowledge.) My own judgment is that the community generally is more likely to be sensitive to the consequences of error in tax matters by reason of a generalised awareness of the harshness of tax penalties than by particular knowledge of decided cases.
5.9 However, whether the matter be viewed as a particular or general deterrent, the notion of being liable to compensatory interest of 20% p.a. - non-deductible - without any additional penalty at all by way of a culpability factor, is likely to be sufficient deterrent to all whose commitment to honesty needs the
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stimulus of a deterrent and who will respond to it. On the other hand, even a more substantial sanction is not likely to be a deterrent to those who consciously elect to understate income, taking the optimistic view that their understatements will not be detected.6. Conclusions
6.1 Having regard to all of the foregoing, I do not share the views of the Commissioner -
- (a) that N is more culpable than any of the other applicants;
- (b) that all applicants other than N are culpable in the same degree so that the same percentage culpability factor should be taken into account; and
- (c) that any of the present applicants are deserving of the same culpability factor being applied as the Guidelines appear to propose should be applied to all tax avoiders who manage to avoid tax but without being responsible for any "aggravating factors".
Unquestionably all of the errors made by or on behalf of these taxpayers caused loss to the Revenue, but in relative terms the losses to Revenue are insignificant when compared with the consequences for these applicants, particularly where an error on the part of the Commissioner has caused those consequences to be greater than was intended.
6.2 In my view of all the applicants those least deserving of remissions are W - the shopkeeper - and N - the scallop-splitter. Both were conscious throughout the years of the matters giving rise to their tax liability. Neither of them could point to anyone else as contributing to the understatement that they made. The differences in quantum of penalty imposed are most substantial in the case of W, but that is attributable to -
- (a) the relatively high level of W's income;
- (b) the fact that the understatement was a high percentage of W's finally determined income; and
- (c) the prolonged interval of time which passed before the correct assessment of income was finally made.
Even so, I consider 40% to be far too high a culpability factor for either. I am not persuaded that N is the more culpable - as the Commissioner contends - by reason of the communications preceding her assessment or her responses before assessment. In each case in my judgment a culpability factor of the order of 20% - but no less - of tax avoided would be appropriate, particularly bearing in mind the heavy burden of interest at 20% p.a. - nearly $10,000 in the case of W. In the case of N I have based my calculations on the sums of tax avoided being only $196, $350 and $234.
6.3 M - the salesman - differs little in personal culpability. He can point to breaches of duty by a public company as a factor, but I am not persuaded that it was the major factor giving rise to the understatement. Of all the applicants, other than A and possibly K, he was the most sophisticated in commercial matters and the one to pay closest attention to his financial position. In his case in my judgment a culpability factor of the order of 15% (plus or minus 10% of that figure) would be appropriate.
6.4 R - the truckdriver - was the person least equipped to be aware of the significance of the circumstances which gave rise to the understatement of his income. However, as I have said, he did engage in a course of dealings with his employer which was sufficiently irregular for him to be unable to adequately explain it. In my judgment a penalty by way of culpability factor of the order of 10% (plus or minus 10%) is appropriate. (I recognise that even then an application for relief from his obligations to pay tax to the Tax Relief Board may be appropriate and, possibly, necessary.)
6.5 A - the colonial pensioner - was almost totally without personal blame. There was one mistake made twice contrary to the pattern of many years; and it was a mistake made by a person with nothing to gain from the error. Furthermore the accountant, in acting negligently, was departing from high standards maintained over several decades. It was such a mistake as might easily have been made anywhere and by anyone. In my judgment a culpability factor of the order of 10% would be appropriate.
6.6 The problem of K - the husband - raises quite different issues. The fact that there could have been such an error is due in large part to the increasing complexity of tax legislation and the circumstance that, for a spouse to claim "spouse rebate", he is required to answer accurately with reference to the
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"separate net income" of his partner during a particular period of time when the answer can only be certainly known and accurately known to the spouse. That must always involve risk for any claimant, particularly in any period of deteriorating matrimonial relationship, especially when the fact of deterioration may not even have been recognised. That risk can only be avoided by not making the claim or perhaps by making the claim and attending it with a declaration expressing belief in the entitlement to make the claim but not asserting that the belief is well founded. Such an expression of want of confidence in one's spouse would be more likely to cause matrimonial breakdown than strengthen the relationship. It would also be likely to result in non-allowance of the rebate. In my judgment the claims of society will be well satisfied if a culpability factor approximating 5% is imposed.6.7 As to F, in my judgment the failure to assess at the time of the original assessment is almost as much due to a failure on the part of the Commissioner to advert to the information presented by the taxpayer as it was to any deficiency in the presentation of that information. In my view it is appropriate that there should be no culpability factor and, further, bearing in mind the fact that thereafter the delay in correct assessment is wholly attributable to the Commissioner, I would only allow a penalty directed to acknowledging the fact that there was an omission on the part of the applicant; and that there was inadequacy in presentation of the information that was provided. In doing so I would only partially compensate for the loss to the Revenue as measured by the special interest rate of 20% p.a.
7. Decisions
7.1 In summary form the additional tax levied was calculated - according to the figures supplied to the Registrar by the Commissioner - as follows:
Tax avoided 10% p.a. 20% p.a. Fault Total
$ $ $ $ $
F 218 1983 - 70.75 87.40 158.15
A 2,470 1983 - 623.79 983.52 1,607.31
1,263 1984 - 69.21 505.26 574.47
------ -------- --------
693.00 1,488.78 2,181.78
M 372 1981 * 69.20 75.44 193.92 338.56
726 1982 * 34.72 109.74 291.32 435.78
------ ------ ------ ------
103.92 185.18 485.24 774.34
1981 ** 51.56 56.22 144.51 252.29
1982 ** 31.18 98.56 261.63 391.37
----- ------ ------ ------
82.74 154.78 416.14 653.66
* as levied ** as intended to be levied
W 9,499 1980 3,617.67 3,799.86 7,417.53
9,869 1981 3,758.40 3,947.68 7,706.08
5,839 1982 2,223.80 2,335.81 4,559.61
1,899 1983 319.51 759.76 1,079.27
-------- --------- ---------
9,919.38 10,843.11 20,762.49
(late lodgment) 3,948.49 752.06 4,700.55
-------- --------- --------- ---------
3,948.49 10,671.44
†According to my calculations the figures so identified do not represent accurately the percentage calculations they are supposed to reflect. Yet, since the calculations by figures reconcile to the amount of additional tax assessed, I can only assume that each figure is a balancing factor reconciling the calculated "compensation" factor to the amount assessed. The problem affirms me in my resolution hereafter to require full details of the calculations; and confirms me in the view that it is not to be assumed in these matters that calculations prepared on behalf of the Commissioner are correct, even if a computer has been used as an aid to persons in effecting those calculations. If it happens, as well it may, that my mathematical skills have been established to be inadequate, those who appear in future will no doubt take care to present their calculations in full detail and thereby avoid the difficulties I have experienced. For my part any assumption that there might have been that the Commissioner's calculations are sound (cf. Stewart (ante) para. 1.10) is no longer to be automatically relied on.
7.2 Having considered all of the foregoing matters it remains to determine in precise monetary amounts the additional tax to be exacted of each of the applicants. Each determination will reflect a weighing and a weighting of all the relevant factors which have been considered relevant. In particular, the assessment will have regard to the fact that the interest rate of 20% p.a. applied in the calculation is itself a severe rate when applied to taxpayers such as these. The result in each case will be a figure determined by a process of assessment and judgment, not by a precise and carefully measured application of mathematical formulae. For that reason in the foregoing passages I have referred to culpability factors "of the order of" and "approximating". I have also taken into account the severe effect for these persons of a "compensatory" interest rate of 20% p.a.
7.3 My orders will be that penalties for additional tax imposed pursuant to sec. 226(2) of the Income Tax Assessment Act be reduced as follows:
- (a) for F, from $158 to $50 in relation to the year of income ended 30 June 1983;
- (b) for A, from $1,607 to $850 and from $574 to $200 in the years of income ended 30 June 1983 and 1984 respectively;
- (c) for M, from $338 to $170 and from $435 to $240 in years of income ended 30 June 1981 and 1982;
- (d) for W, from $7,417 to $5,400; from $7,706 to $5,600; from $4,559 to $3,300; and from $1,079 to $700 in the years of income ended 30 June 1980 to 1983;
- (e) for N, from $199 to $140; from $339 to $200; and from $295 to $100 in the years of income ended 30 June 1982 to 1984;
- (f) for R, from $529 to $350; from $1,283 to $825; from $1,257 to $725; and from
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$732 to $325 in the years of income ended 30 June 1980 to 1983; and - (g) for K, from $420 to $220 for the year of income ended 30 June 1982.
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