Decision impact statement

Brown v Commissioner of Taxation

This version is no longer current. Please follow this link to view the current version.

• This document has changed over time. View its history.

Court Citation(s):
[2006] AATA 1107
2006 ATC 2573
(2006) 65 ATR 172

Venue: Administrative Appeals Tribunal
Venue Reference No: QT 2003/413
QT 2005/318
Judge Name: Deputy President PE Hack
Judgment date: 21 December 2006
Appeals on foot:
No

Impacted Advice

Relevant Rulings/Determinations:

• None

Subject References:
Administrative penalty for statements
False or misleading statements
Administrative penalty for schemes
Scheme benefit
Jurisdiction of Administrative Appeals Tribunal

Brief summary of facts

In an original return lodged in September 2002 the applicant claimed a deduction under section 92 for a share of a partnership loss. The applicant lodged an amended return in February 2003 which did not include the section 92 deduction.

The Commissioner assessed the applicant on the basis of the original return on 26 May 2003. The Commissioner concluded that the section 92 deduction was not an allowable deduction and on 2 June 2003 he amended the assessment in accordance with the amended return. Given the lodgement of the amended return prior to an assessment of the original return being made, the Commissioner remitted any Subdivision 284-B shortfall penalty tax that would otherwise have been payable.

The applicant claimed in an objection against the amended assessment dated 2 June 2003 that the partnership loss was an allowable deduction. In considering the applicant's objection the Commissioner concluded that, if a deduction was allowable to the applicant under section 92, Part IVA applied to deny the deduction claimed for the partnership loss. The Commissioner made a Part IVA determination, and an amended assessment issued on 23 October 2003 to give effect to the Part IVA determination. A penalty assessment imposing scheme penalty under Subdivision 284-C of Schedule 1 to the Taxation Administration Act 1953 (TAA) was also made. In making the penalty assessment, it was contended that the Subdivision applied whether the scheme succeeded in obtaining a tax deduction for the taxpayer but for Part IVA, or failed to obtain a tax deduction; this being understood to have been the intended effect of the provision.

The applicant objected against the amended assessment dated 23 October 2003 and the penalty assessment. The Commissioner did not assess, and the applicant did not object against, penalty tax under Subdivision 284-B.

The Commissioner disallowed the objections and the applicant applied to the Administrative Appeals Tribunal ('Tribunal') for review of the Commissioner's objection decisions.

Before the Tribunal neither the taxpayer nor the Commissioner made any submissions about Subdivision 284-B, because it was not in issue, nor did the Tribunal seek submissions on this point from either party.

Issues decided by the court or tribunal

No partnership existed and the applicant was not entitled to any deduction for a share of the partnership loss.

No scheme penalty applied as Subdivision 284-C did not apply where the relevant deduction was not allowable under a primary provision.

Although the Commissioner did not impose any statement penalty under Subdivision 284-B of Schedule 1 to the TAA, and no Subdivision 284-B aspects were part of the applicant's objection, the Commissioner's objection decision, and the parties' submissions before the Tribunal, the Tribunal purported to make a Subdivision 284-B decision in reliance on subsection 43(1) of Administrative Appeals Tribunal Act 1975. Subsection 43(1) provides that, for the purpose of reviewing a decision, the Tribunal may exercise all the powers and discretions that are conferred on the original decision maker. (It is to be assumed that the Tribunal considered that the Commissioner had that power, but we are advised that he did not: see further below.)

The Tribunal then held that no statement penalty applied because there was no basis for the application of Subdivision 284-B statement penalty because the statement constituting the incorrect claim in the original return was corrected before the return was assessed. In the words of the Tribunal, '... the tax shortfall did not result from a false or misleading statement by the applicant, it resulted from the respondent assessing on the basis of facts no longer put forward. Put another way, any falsity or inarguable position had been corrected before it had been acted upon.'

Tax Office view of Decision

Penalties relating to schemes (Subdivision 284-C)

Subsection 284-145(1) provides that an entity is liable for administrative penalty if the entity 'would, apart from a provision of a *taxation law or action taken under such a provision (the adjustment provision ), get a *scheme benefit from a *scheme ....'

Subsection 284-150(1) states that an entity gets a scheme benefit from a scheme if 'a tax related liability of the entity for an accounting period is, or could reasonably be expected to be, less than it would apart from the scheme or part of the scheme ....'

The scheme shortfall amount is the amount of the scheme benefit obtained from the scheme apart from the adjustment provision (subsection 284-150(2)).

The Tribunal's decision assumes that the phrases 'apart from a provision of a taxation law ... (the adjustment provision)' in subsection 284-145(1) and 'apart from the adjustment provision' in subsection 284-150(2) preclude the application of Subdivision 284-C where a scheme deduction is not allowable under a primary provision such as section 8-1. The possibility that Subdivision 284-C may not apply to a 'failed' scheme had previously been recognised. The decision of the Tribunal in this respect appears to be correct.

Administrative Penalty for Statements (Subdivision 284-B)

Natural Justice

The Commissioner's legal advice was that it was questionable whether the Tribunal had jurisdiction to make any decision in respect of Subdivision 284-B. The Commissioner did not impose any Subdivision 284-B penalty in relation any false or misleading statement. There were no Subdivision 284-B grounds of objection and the Commissioner did not consider Subdivision 284-B in making his objection decision. The Commissioner's understanding of the legal position is that he may not normally ask the Tribunal, in reviewing his decision on objection, to exercise any power he could not himself have exercised for the purpose of making a decision on the applicant' objection at the time he in fact made that decision. It is thought that if the applicant had been notified, as he ought to have been, that the Tribunal was proposing to consider this issue, it is probable that the applicant would have been entitled to object to the jurisdiction of the Tribunal to do so. Moreover, the Commissioner had already remitted any penalty arising under this Subdivision.

We are also advised that if the Tribunal had jurisdiction to make a decision under Subdivision 284-B, it did so in a way that denied procedural fairness to the parties. The parties did not address Subdivision 284-B at the Tribunal and the Tribunal decision on Subdivision 284-B was made without reference to the parties. As the parties were not heard on the issue we do not consider that they were accorded natural justice.

Accordingly the Tribunal should not have made any Subdivision 284-B decision.

However, it was not a case where an appeal by either the Commissioner or the applicant would have been appropriate. In the applicant's case, the decision on the point was ultimately favourable to him, so that an appeal would be pointless. It was likewise impossible for the Commissioner to appeal without contending that penalty under this Subdivision was in fact applicable, but we considered that the previous remission of penalties by the Commissioner meant that even if the Subdivision had applied before the remission, no penalties were payable in any event.

We were advised that the result of this unsatisfactory state of affairs was that there was no available means to correct the errors of law made by the Tribunal.

The Tax Shortfall

The Tribunal concluded that the Commissioner assessed the original return to create a tax shortfall when the false statement had already been corrected and that therefore no penalty had arisen. The correct position is this:

Penalty for a false or misleading statement imposed under subsection 284-75(1) applies where three conditions are satisfied:

•

the entity makes a statement;

•

the statement is false or misleading in a material particular;

•

there is a shortfall amount as a result of the statement.

Under subsection 284-80(1) a shortfall amount exists if a tax related liability worked out on the basis of a statement is less than it would be if the statement were not false or misleading. The liability arises whether an assessment is, or is not, based on the false or misleading statement. The expression 'worked out on the basis of' means no more than 'calculated by reference to'. When a false or misleading statement is made to the Commissioner about a tax-related matter, a taxpayer thereupon becomes liable to penalty tax under Subdivision 284-B, regardless of whether, or when, the error in the statement is detected, and even regardless of any subsequent retraction by the taxpayer (although retraction is plainly relevant in deciding whether a penalty should be remitted).

In this case, the Commissioner had decided that it was appropriate to remit all penalties under Subdivision 284-B and had in fact remitted them. In an appropriate case, however, penalties for a false claim made in either a tax return or an objection might arise even though the Commissioner was not deceived by them; and penalties for a false or misleading statement would not ordinarily be remitted merely because they were detected before an assessment was made or an objection decided.

Administrative Treatment

Implications for general administration

Under subsection 298-30(1) of Schedule 1 of the TAA 'The Commissioner must make an assessment of the amount of an administrative penalty under Division 284.'

Where a taxpayer's deduction is disallowed on alternative grounds such as section 8-1 and Part IVA, it may be appropriate that the taxpayer is assessed an administrative penalty based on both or either of Subdivision 284-B and Subdivision 284-C.

Where a deduction is allowable under a primary provision but Part IVA applies to deny the deduction, Subdivision 284-C will apply to penalise the scheme benefit. If a false or misleading statement is also made to the Commissioner, Subdivision 284-B penalty may also be payable. If cumulative penalties are excessive for the matter penalised, it would be appropriate to remit the excessive amount. The remission decision will remit so much of the penalty tax payable under both Subdivisions that exceeds a specified sum, being the maximum amount that is thought to be appropriate by way of penalty. It will not purport to remit the penalty under a particular Subdivision, which appears to be unnecessary in any event, and will be inappropriate if the taxpayer is contesting the amount of penalty imposed by both or either of the Subdivisions, as it may result in no or insufficient penalty if the wrong Subdivision is identified.

Where a primary provision applies to deny a deduction, Subdivision 284-B will penalise a false or misleading statement and there would normally be no need to consider Subdivision 284-C.

Where a penalty assessment is made and the primary assessment is based on alternative grounds, e.g., section 8-1 and Part IVA, the penalty assessment will refer to the alternative grounds contained in Subdivision 284-B and Subdivision 284-C. It is sufficient that the liability is raised in one notice of penalty assessment provided the grounds are clearly stated in the notice of assessment.

Implications on current Public Rulings & Determinations

Consideration will be given to whether there are any implications for public rulings or determinations.

Implications on Law Administration Practice Statements

No Law Administration Practice Statement deals with this subject.

Legislative References:
Taxation Administration Act 1953
Schedule 1
Subdivision 284-C
284-145
284-150
284-80
Subdivision 284-B
284-75
Subdivision 284-A
284-35

Case References:
Commissioner of Taxation v Hornibrook
[2006] FCA 170
2006 ATC 4761
65 ATR 1