CASE 34/95

Members:
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 31 May 1995

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KL Beddoe (Senior Member)

In a notice of assessment dated 20 January 1994, the respondent in this matter notified ``Understatement Penalty and Interest'', pursuant to section 226G of the Income Tax Assessment Act 1936 (``the Act''), in the amount of $5,927.01 for the year of income ended 30 June 1993. By his tax agent, the applicant lodged a notice of objection against assessment dated 7 February 1994. That objection was disallowed in full by an objection decision of the respondent dated 7 June 1994. It

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is this objection decision which the applicant is now seeking review of in this Tribunal.

2. Section 82AAT of the Act specifies the conditions which must exist before superannuation contributions made by an individual are an allowable deduction. In particular, the relevant paragraph of subsection 82AAT(1) reads as follows:

``A person who has made a contribution to a fund during a year of income is entitled to an allowable deduction for the contribution in the person's assessment for the year of income if all the following conditions are met:

• (a) the person is an eligible person in relation to the year of income;
• ...''

Subsection 82AAS(2) defines an ``eligible person'':

``A person (in this subsection referred to as the `relevant person' ) is an eligible person in relation to a year of income for the purpose of the Subdivision unless-

• (a) during the whole or a part of the year of income circumstances existed by reason of which it was reasonable to expect that superannuation benefits would be provided for the relevant person in the event of the retirement of the relevant person or for dependants of the relevant person in the event of the death of the relevant person (whether or not any condition other than the retirement or death of the relevant person would be required to be satisfied in order that those benefits be provided); and
• (b) to the extent to which those benefits would be attributable to the year of income-
  • (i) the benefits would be wholly or partly attributable to contributions made to a superannuation fund in relation to the relevant person by a person other than the relevant person; or
  • (ii) the benefits would, in whole or in part, be paid out of moneys that would not represent-
    • (A) contributions made by the relevant person to a superannuation fund; or
    • (B) contributions made by the relevant person under a scheme for the payment of benefits upon retirement or death, being a scheme constituted by or under a law of the Commonwealth or of a State or Territory; or
    • (C) income or accretions arising from contributions referred to in sub-subparagraph (A) or (B); or
    • (D) income or accretions arising from contributions made to a superannuation fund in relation to the relevant person by a person other than the relevant person during an earlier year of income, where there is no reasonable likelihood that any such contributions will be made at any time after the beginning of the first-mentioned year of income.''

Subsection 82AAS(3) reads as follows:

``If:

• (a) during a period, or a combination of periods, in a year of income, a person was engaged in particular eligible employment; and
• (b) either:
  • (i) both:
    • (A) the person's assessable income, or the person's exempt income, of the year of income includes one or more amounts that were derived from that eligible employment; and
    • (B) the total of the amounts mentioned in sub-subparagraph (A) is less than 10% of the person's assessable income of the year of income; or
  • (ii) the person's assessable income, or the person's exempt income, of the year of income does not include any amount that was derived from that eligible employment;

a reference in subsection (2) to superannuation benefits does not include a

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reference to superannuation benefits to the extent to which:

• (c) they would be attributable to, or paid out of money representing:
  • (i) contributions made in relation to the person in connection with that eligible employment; or
  • (ii) income or accretions arising from such contributions; or
• (d) they would otherwise be attributable to that eligible employment.''

Subsection 82AAS(1) defined ``eligible employment'' widely to include:

``(a) the holding of any office or appointment; or

(b) the performance of any functions or duties; or

(c) the engaging in of any work; or

(d) the doing of any acts or things;

that results in the person being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (assuming that subsection 12(11) of that Act had not been enacted);''

The Superannuation Guarantee (Administration) Act 1992 in section 12 gives ``employee'' its ordinary meaning, along with some expanded definition.

3. Section 226G of the Act provides that where a taxpayer has a tax shortfall for a year which was caused, in full or in part, by the failure of the taxpayer or a registered tax agent to take reasonable care to comply with the provisions of the Act or the regulations, the taxpayer will be liable to pay a penalty of additional tax equal to 25% of the amount of the shortfall.

4. A ``tax shortfall'' is defined in section 222A of the Act as the amount by which the taxpayer's statement tax for the year at the time which it was at its lowest was less than the taxpayer's proper tax for the year. ``Statement tax'', also defined in section 222A as the tax that would have been payable by the taxpayer in respect of the year in question if the taxpayer had been assessed on the basis of taxation statements made by the taxpayer after allowing the credits claimed by the taxpayer.

5. At the hearing of this matter the applicant taxpayer was represented by a firm of accountants who act as the taxpayer's tax agents, and Mr Bland of counsel, instructed by the Australian Government Solicitor, appeared for the respondent Commissioner. The Tribunal had before it the documents filed pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (``the T-Documents''), as well as a number of other documents in clarification and expansion of the T- Documents. The applicant's tax agent, Mr David Issell of Legal and General and an officer of the Australian Taxation Office gave oral evidence before the Tribunal. The taxpayer was not called to give evidence.

6. For the year of income ended 30 June 1993 an income tax return was lodged on behalf of the taxpayer, by his tax agent, on 15 November 1993. That return (T5), lodged electronically lists a number of sources of income for the applicant, including income for which group certificates applied. Those sources of income are itemised at T5 as follows:

                                      $
           Services Ltd            23,768
           Industries Pty Ltd      37,210
           CI Pty Ltd              31,603
      

The same return claims as a deduction contributions made to the ``Family Superannuation Fund'' in the amount of $49,325.

7. Exhibit A is headed ``Tax Agent Prepared Error and Omission Amendment Form'', and dated 17 November 1994 and apparently lodged on 18 November 1994. In the description on that form of the amendments requested it is stated ``Consultancy fees of $60,978 were inadvertently shown at Item 3, and should have been shown at Item 20.'' That document was filed in the name of the predecessor to the taxpayer's present tax agent. It was the evidence of the present tax agent that in the original return, amounts received from Services Ltd and Industries Pty Ltd were noted as income but should have more correctly been claimed as consultancy fees. Group certificates were not issued by either Services Ltd or Industries Pty Ltd. However, the tax agent agreed that the taxpayer had been in the employment as such of CI Pty Ltd, the employment ceasing on 31 October 1992. At the time the return was lodged, says the tax agent, the applicant taxpayer was self-employed and benefited from no employer-sponsored superannuation. This error regarding the incorrect labelling of consultancy fees was

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discovered, on the tax agent's evidence, in December 1993. The group certificates from CI Pty Ltd did not include details of superannuation contributions made. The company CI Pty Ltd is associated with the taxpayer and to the best of the tax agent's recollection, the taxpayer is a 50% shareholder in that company.

8. By letter dated 20 December 1993, an officer of the respondent informed the taxpayer, by way of the taxpayer's tax agent, that the claimed deduction for contributions to the superannuation fund would not be available and that an adjustment sheet would accompany the notice of assessment issued.

9. In his oral evidence, and in a letter dated 30 May 1994 (T9/23), the taxpayer's tax agent set out the circumstances behind the deduction being claimed. The relevant part of the letter is as follows:

``The grounds for our objection are that reasonable care was taken in the preparation of the taxpayer's return for the year as above and in particular in making the claim for a deduction in respect of superannuation contributions. At the time of preparing [the taxpayer's] return, it was our understanding that no contributions had been made by [the taxpayer's] ex-employer on his behalf in respect of the year ended 30 June 1993.

Further, [the taxpayer's] ex-employer had a substantial deficiency in shareholder's funds and there was some doubt as to whether the company would be in a position to make superannuation contributions on [the taxpayer's] behalf.

While admitting that the superannuation guarantee charge is deemed to be paid during the year for which it is payable even though the employer does not pay the charge until the subsequent year, this will not be the case where the charge is never paid as a result of the subsequent liquidation of the employer or for other reasons. Further, even if the charge is paid in some subsequent year but after the due date for lodgement of the return for the year in question, then an amended return would be required to be lodged deleting the claim for a deduction for the employee's superannuation contribution. The lodgement of an amended return in these circumstances would not attract a penalty under section 226G of the Act.

As it transpired and contrary to our initial understanding, [the taxpayer's] employer had made contributions to a superannuation fund on his behalf both just before his resignation and following his resignation from that company and this was only discovered by us after the lodgement of his return.''

10. The taxpayer's tax agent is the senior principal at the firm of accountants which prepared his income tax returns for the relevant year of income. He and the senior bookkeeper of the firm prepared the taxpayer's return. The tax agent recalled the bookkeeper contacting the offices of CI Pty Ltd in order to establish whether superannuation contributions had been made on behalf of the taxpayer, however his evidence on this matter, particularly in respect of the timing of the contact and the answers received, is too imprecise to be of any assistance to the Tribunal. The procedure routinely followed by his firm when preparing a client's income tax return was also explained. This process includes the checking of the return with the client concerned.

11. The returns for CI Pty Ltd, on the evidence of the tax agent, were prepared and lodged in December 1993 by his firm.

12. Exhibit 3 is a document tendered through Mr David Issell, an officer of Legal and General. The document is a computer printout from the company's mainframe detailing the superannuation contributions made by CI Pty Ltd in the name of the taxpayer. That statement shows that the following amounts were paid into the superannuation account of the applicant as employer contributions in the relevant year of income:

           Date                     $

      21 October 1992           1,500.00
      23 November 1992            500.00
      17 December 1992            500.00
      12 February 1993            500.00
      24 February 1993            500.00
      

There is no reason to doubt the accuracy of the document tendered and I find that contributions in the above amounts were made on behalf of the taxpayer on the dates specified, by CI Pty Ltd.

13. Exhibit C is a copy of page 26, Question 29 of the Tax Pack for the year of income ended 30 June 1993. That page is headed ``Are you entitled to a deduction for your superannuation

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contributions?''. The document then goes on to detail the circumstances in which a deduction for superannuation contributions may be claimed. It explains as follows:

``You can claim a superannuation deduction only if you can answer `Yes' to one of the following:

• 1. You were wholly self-employed during 1992/93.
• 2. If you were not wholly self-employed, none of the people you worked for provided you with superannuation support by either sponsoring your superannuation or by choosing to pay a Superannuation Guarantee Charge.
• 3. One or more of the people you worked for provided you with superannuation support, but your income from those people is less than 10% of your total assessable income.''

14. Exhibit 2 is a bundle of documents covered by an undated letter of the Australian Taxation Office and signed by an Assistant Commissioner of that office. The bundle of documents is part of a continuing stream of information apparently provided by the Australian Taxation Office to registered tax agents. This particular bundle related to the month August 1993. An officer of the respondent gave oral evidence before the Tribunal that these bundles were sent by the Australian Taxation Office on a regular basis and I so find. One page of that bundle deals with Superannuation Deduction Claims. That document summarises eligibility for the superannuation deduction. Further, it directs the reader to sources of more detailed information. The summary it provides reads as follows:

``For clarification, a deduction for superannuation contributions is available only to self employed persons or employees without any employer superannuation support. Generally, an employee has employer superannuation support where his or her employer:

• • makes contributions on behalf of the employee to a superannuation fund under an industrial agreement;
• • is required by the Superannuation Guarantee Act to make contributions to a superannuation fund on behalf of the employee; or
• • makes contributions on behalf of the employee to a superannuation fund under any other occupational superannuation arrangement.''

15. The tax agent could not confirm whether this circular had been received by his offfice but agreed that it was his understanding that such documents were regularly circulated to all tax agents. Counsel for the respondent did not call evidence to prove that the circular had actually been sent to the particular tax agent but asked me to infer that it had in fact been sent and received. Given the evidence before me of the tax offficer and indeed the tax agent's own statements I am prepared to infer that such a document was received in the tax agent's offices.

16. Turning to the initial question of whether the deduction could be correctly claimed as allowable the taxpayer was clearly an employee of CI Pty Ltd within the meaning of the Superannuation Guarantee (Administration) Act 1992, and I so find. By definition it follows that he was engaged in ``eligible employment'' as defined in subsection 82AAS(1) of the Act.

17. I find that the contributions made in the year of income ended 30 June 1993 to Legal & General by CI Pty Ltd on behalf of the taxpayer are attributable to that eligible employment and as such, and through the operation of subsection 82AAS(2), takes the taxpayer out of the definition of ``eligible person''.

18. The operation of subsection 82AAT(1) therefore excludes the taxpayer's own contributions to the M Family Trust from being an allowable deduction, and I so find.

19. Exhibit B illustrates the calculation of the tax shortfall according to the taxpayer's tax agent. It is not necessary to set out the details of the calculation. The method was explained by the tax agent as involving an offset of the taxpayer's liability and the liability of CI Pty Ltd. With respect, and accepting Mr Bland's submissions on this matter, this offsetting is not correct. There is no error in the tax shortfall as calculated by the respondent, and I so find.

20. It was the submission of counsel for the respondent that in the particular circumstances before me, it ought to have been apparent to a reasonably careful tax agent that such a deduction could not be rightly claimed. Further, counsel argued, the justification of a checking process in place to avoid such errors does not

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answer the question as to reasonable care in the particular instance. I make no comment as to this proposition generally, other than to say, in the circumstances before me, there is no evidence to suggest that appropriate checks were made.

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

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

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

24. To support a reduction of the penalty imposed and an exercise of the power contained in section 227 of the Act, the applicant relies on the contention that no loss had in actuality been suffered by the revenue as detection was made prior to the due date for payment of the tax, that is, 15 April 1994. Further it was the evidence of the tax agent that an amended return would have been lodged prior to 15 April 1994 but for the earlier detection of the error by the Australian Taxation Offfice.

25. For the reasons set out above and being satisfied the tax shortfall was caused by the failure of the taxpayer or the tax agent to take reasonable care to comply with the Act the objection decision under review is affirmed.