FEDERAL COURT OF AUSTRALIA Archibald Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Commissioner of Taxation [2008] FCAFC 54 TAXATION – penalty imposed on taxpayer – misleading or deceptive statement made to the Commissioner – error detected before credit or payment made by the Commissioner – decision to remit part of the penalty – relevant considerations – whether it is a relevant consideration that the Commissioner does not suffer financial detriment as a consequence of the misleading or deceptive statement – whether special circumstances are necessary – whether the personal circumstances of the taxpayer are a relevant consideration Administrative Appeals Tribunal Act 1975 (Cth) s 44 Taxation Administration Act 1953 (Cth) ss 284-10, 284-20, 284-75, 284-85, 284-90, 284-220, 284-225 and 298-20 and Div 284 of Sch 1 ARCHIBALD DIXON AS TRUSTEE FOR THE DIXON HOLDSWORTH SUPERANNUATION FUND v COMMISSIONER OF TAXATION QUD251 OF 2007 SPENDER, RYAN & EMMETT JJ 8 April 2008 BRISBANE IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QUD251 OF 2007 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: ARCHIBALD DIXON AS TRUSTEE FOR THE DIXON HOLDSWORTH SUPERANNUATION FUND Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: SPENDER, RYAN & EMMETT JJ DATE OF ORDER: 8 April 2008 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The appeal be allowed in part. 2. In addition to Order 2 made on 25 July 2007, there be the following additional order: 2A. The matter be remitted to the Administrative Appeals Tribunal for determination according to law. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QUD251 OF 2007 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: ARCHIBALD DIXON AS TRUSTEE FOR THE DIXON HOLDSWORTH SUPERANNUATION FUND Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: SPENDER, RYAN & EMMETT JJ DATE: 8 APRIL 2008 PLACE: BRISBANE REASONS FOR JUDGMENT THE COURT: 1 This appeal concerns the exercise of the discretion conferred by s 298-20 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the Administration Act) to remit penalties imposed pursuant to s 284-90 of that Schedule for making a false statement to the respondent (the Commissioner). The question, upon which the appeal turns, is whether the decision maker is entitled to have regard to the fact that no harm was done, because the false statement was discovered before anyone relied on it. 2 Division 284 of Schedule 1 to the Administration Act deals with, amongst other things, administrative penalties for statements. Under s 284-10, the object of Division 284 is to provide a uniform regime for the application, under all taxation laws, of administrative penalties for entities that fail to meet their obligations under those laws in relation to, inter alia, making false or misleading statements. Under ss 284-20 and 284-25, Division 284 applies to a statement made in any way for a purpose connected with a taxation law and, in particular, applies to a statement made in an approved form by a taxpayer's agent as if it had been made by the taxpayer. 3 Under s 284-75, a taxpayer is liable to an administrative penalty if the taxpayer, or the taxpayer's agent, makes a statement to the Commissioner, the statement is false or misleading in a material particular and the taxpayer has a shortfall amount as a result of the statement. Under s 284-80, a taxpayer has a shortfall amount if, relevantly, an amount that the Commissioner must pay or credit to a taxpayer under a taxation law for an accounting period, worked out on the basis of the false or misleading statement, is more than it would be if the statement were not false or misleading. A shortfall amount is the amount by which the relevant payment or credit is more than it would otherwise have been. 4 Section 284-85 requires that the base penalty amount be worked out in relation to any shortfall amount. The base penalty amount is the amount of the penalty, unless the base penalty amount is increased under s 284-220 or reduced under s 284-225. Section 284-220 deals with increases where, for example, the taxpayer takes steps to prevent or obstruct the Commissioner from finding out about the shortfall amount. Section 284-225 deals with reduction where, for example, the taxpayer tells the Commissioner voluntarily about a shortfall after the Commissioner tells the taxpayer that a tax audit is to be conducted. The base penalty amount is worked out under s 284-90. Relevantly, for present purposes, if the taxpayer's shortfall amount resulted from recklessness, by the taxpayer or the taxpayer's agent, as to the operation of a taxation law, the base penalty amount is 50% of the shortfall amount. 5 However, under s 298-20, the Commissioner may remit all or part of the penalty. If the Commissioner decides not to remit the penalty or to remit only part of the penalty, the Commissioner must give written notice of the decision and the reasons for the decision to the taxpayer. If the Commissioner refuses to any extent to remit an amount of penalty and the taxpayer is dissatisfied with the decision, the taxpayer may object against the decision. 6 The appellant, Mr Archibald Dixon (the Taxpayer), in his capacity as trustee of a superannuation fund, purchased a commercial property in 2003. Goods and services tax (GST) was not levied on the sale because the property was fully tenanted and was acquired as a going concern. A business activity statement (BAS) was lodged with the Commissioner on behalf of the Taxpayer. Because the Taxpayer's tax agent at that time recognised that GST was not payable, no input tax credit was sought from the Commissioner in the BAS. 7 Subsequently, the Taxpayer engaged a new tax agent who prepared an amended BAS on behalf of the Taxpayer. In the amended BAS, a claim was made for an input tax credit in the sum of $171,491. The amended BAS was lodged with the Commissioner. It is common ground that the Taxpayer was not entitled to an input tax credit and the amended BAS contained a false or misleading statement 8 The Commissioner detected the false or misleading statement that was made in the amended BAS before any input tax credit was given to the Taxpayer. However, the Commissioner imposed an administrative penalty pursuant to Division 284, on the basis that the claim for an input tax credit was made recklessly. The penalty levied was $85,681, being 50% of the shortfall amount of $171,491. 9 The Taxpayer objected to the Commissioner's decision not to remit the penalty. On 23 June 2005, the Commissioner disallowed the objection. On 22 August 2005, the Taxpayer applied to the Administrative Appeals Tribunal (the Tribunal) for review of the Commissioner's decision. On 17 February 2006, the Tribunal varied the Commissioner's decision not to remit the penalty, concluding that the penalty should be fixed at 25% of the shortfall amount, with the balance of the penalty to be remitted. 10 On 16 March 2006, the Commissioner filed a notice of appeal to the Federal Court pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth). Under that provision, an appeal lies only on a question of law. Because the Taxpayer contended that the Commissioner's notice of appeal failed to formulate a question of law, an amended notice of appeal was filed on 21 September 2006, pursuant to leave granted on 18 September 2006. On 25 July 2007, after a hearing on 9 October 2006, a judge of the Court ordered that the appeal be allowed and that so much of the decision of the Tribunal as varied the Commissioner's decision under review, by remitting part of the administrative penalty, be set aside. The Taxpayer has now appealed to the Full Court from the orders of the primary judge. Before attempting to identify the question of law raised by the appeal, it is necessary to say something about the Tribunal's reasons for its decision. 11 The Tribunal was satisfied that the Taxpayer genuinely did not understand why he had not been able to claim an input tax credit in respect of the transaction and accepted that the Taxpayer did not understand the way in which the Australian tax system worked. However, the Tribunal was also satisfied that the Taxpayer knew that his original tax agent had considered the question and made a decision. The Tribunal accepted that the new tax agent had told the Taxpayer that a claim could be made and that the money could be returned if it turned out that the claim was mistaken. The Tribunal was satisfied that the Taxpayer decided to proceed with the claim on that speculative basis. The Tribunal accepted, however, that the new tax agent had an imperfect understanding of the consequences of the filing a BAS containing a misleading or false statement. 12 Nevertheless, the Tribunal was satisfied that the decision to submit the amended BAS was the product of recklessness on the part of the new tax agent, who should not have submitted the BAS when he had not obtained clear confirmation that the sale of the commercial property was subject to GST. The Tribunal considered that the recklessness was clearly evident in the tax agent's suggestion to the Taxpayer that the amended BAS should be submitted on the understanding that the money could simply be repaid if the claim turned out to be mistaken. The Tribunal was therefore satisfied that the decision to impose the penalty on the basis of recklessness was the correct and preferable decision. 13 The Tribunal then examined the question of remission of the penalty. The Tribunal said that, even if it accepted that the Taxpayer was blameless, it does not follow that that is a basis for remitting the penalty. The Tribunal recognised that the regulatory regime rendered the Taxpayer liable for penalties imposed not only in respect of his own mistakes but also in respect of those committed on his behalf by his agent. The Tribunal accepted that the legislative intention in imposing such a form of statutory vicarious liability would be subverted if the penalty were to be remitted whenever a taxpayer established that the error was attributable to the agent rather than the taxpayer. The Tribunal considered that, if a taxpayer is forced to accept a penalty that is attributable to an agent's negligence, the taxpayer should be left to make a claim against the agent. 14 The Tribunal proceeded on the basis that one must identify special circumstances before remitting a penalty and that the exercise of the discretion should be the exception rather than the rule. In the Tribunal's view, if it were otherwise, the deterrent effect of penalties would be diminished. The Tribunal also proceeded on the basis that the decision maker must consider circumstances that could be regarded as mitigating the taxpayer's behaviour in some way, while bearing in mind the purpose for which tax is imposed and paid and the role of the relevant legislation. 15 The Tribunal did not regard the search for mitigating circumstances as restricted to the Taxpayer's conduct but considered that the decision maker must have regard to all the circumstances and must weigh the importance of preserving the deterrent value of penalties against the hardship that would be imposed on a particular taxpayer. The Tribunal held that a penalty may be remitted, wholly or in part, in order to avoid a harsh outcome. 16 The Tribunal then proceeded to apply those principles to the case in hand. It observed that the error in the amended BAS had been detected before any credit or refund was given by the Commissioner, although that had occurred because the error was discovered by the diligence of the Commissioner's personnel and not by anything done by the Taxpayer. However, the Tribunal considered that it could not ignore that the Commissioner had become entitled to collect a penalty in the sum of $85,681, even though the input tax credit sought by the Taxpayer was not in fact allowed or paid. Although the Tribunal would not characterise that gain as a windfall, it thought that the outcome was harsh. The Tribunal therefore concluded that the penalty should be reduced to 25% of the shortfall amount, to reflect the fact that no harm had been done. 17 If, by that reasoning, the Tribunal was exercising its discretion on the basis that, in all of the circumstances of the Taxpayer, the penalty was harsh, it would be difficult to discern any question of law raised by its reasoning. The question of whether a particular penalty is harsh in the circumstances of a particular taxpayer is clearly a matter for the decision maker, namely, the Tribunal in the present instance. However, the Commissioner contended that the decision raised the question of law: whether the fact that a credit had not actually been allowed by the Commissioner, because the Commissioner had discovered the false statement before the credit was given, was a consideration that is permitted to be taken into account in the exercise of the discretion to remit a penalty under s 298-20. 18 In the reasons for her decision, the primary judge addressed the questions of law as formulated in the Commissioner's amended notice of appeal. Her Honour's conclusions may be summarised as follows: · The circumstances relevant to the exercise of the discretion to remit are restricted to those relating to the conduct of the Taxpayer and the Taxpayer's circumstances. · The absence of any refund of the tax shortfall amount in the present case is not a relevant consideration for the Commissioner in exercising the discretion to remit the penalty. · The Administration Act, rather than the Commissioner, imposes the penalty that is the subject of the decision to remit. · The fact that a refund of the shortfall amount was never made to the Taxpayer is an irrelevant consideration in the exercise of the discretion to remit and the finding that a refund of the shortfall amount was never made to the Taxpayer and that, therefore, no harm was done, is an irrelevant consideration in the exercise of the discretion to remit. · In light of the fact that penalties are automatically imposed in nominated circumstances, and that the legislature has endeavoured to ensure that penalties are applied uniformly and equitably depending upon culpability, it is necessary that there be special circumstances before the discretion to remit is exercised. · The amount of the shortfall amount is a relevant consideration in exercising the discretion to remit, as it is directly referable to the particular circumstances of the Taxpayer. · The failure of the Taxpayer to consult is relevant to the issue of recklessness but is also relevant to whether the Taxpayer has made genuine attempts to comply with his obligations. · The rate of penalty is relevant because it determines the amount of the penalty to be paid by a particular taxpayer in the relevant circumstances. · The fact that the shortfall amount resulted from recklessness as to the operation of a taxation law is a relevant factor to weigh in conjunction with other factors arising from the particular circumstances of the Taxpayer in reaching a decision as to whether the discretion to remit should be exercised. · The existence or otherwise of special circumstances peculiar to the Taxpayer is a relevant consideration in relation to the discretion to remit, particularly in light of its nature as a leniency discretion. 19 It is difficult to see how all of those questions, assuming they are questions of law, arose in the circumstances of this case. The only relevant question of law was the subject of the ultimate conclusion of the primary judge. Her Honour's ultimate conclusion was that the discretion to remit is not enlivened by whether or not an amount of revenue has or has not been lost: absence of loss of revenue is not a relevant consideration in relation to the exercise of the discretion to remit the penalty. 20 Clearly enough, the primary judge construed the Tribunal's reasons as being a conclusion that the penalty was harsh in the circumstances, simply because no harm was done. If that is what the Tribunal did, it made an error of law. It is apparent that the Tribunal had regard to the fact that there had in fact been no credit allowed. The question of construction of the Tribunal's reasons is whether that was the only factor that rendered the penalty harsh. That is to say, the question arises as to whether the Tribunal, apart from that factor, had regard to the particular circumstances of the Taxpayer in reaching its conclusion that the imposition of a penalty of 50% of the shortfall amount was a harsh outcome. To the extent that the Tribunal had regard to the particular circumstances of the Taxpayer in concluding that there was a harsh outcome such that part of the penalty should be remitted, that was a permissible course open to the Tribunal as the decision maker. 21 To the extent that the primary judge concluded that it is necessary that there be special circumstances before the discretion to remit can be exercised, her Honour was in error. There is nothing in the legislative scheme to suggest that special circumstances must be established. On the other hand, the legislative scheme clearly indicates that the mere fact that no harm has been done is not of itself a matter that can be taken into account. There are two matters that indicate that it is not permissible, in considering the exercise of the discretion to remit a penalty for a false statement, to have regard to the fact that the Commissioner became aware of the falsity before any harm was done. 22 The first is s 284-225, which makes provision for the reduction in the base penalty if a taxpayer voluntarily informs the Commissioner of the existence of the shortfall amount. Section 284-225 provides for a fixed reduction of 20% or 80%. It also provides for reduction to nil in the event of a shortfall amount of less than $1000. In each case, however, the reduction is provided for only if the taxpayer voluntarily tells the Commissioner about the shortfall. On the other hand, the legislative scheme does not make allowance for the possibility that the Commissioner detects a false statement giving rise to a shortfall amount before any harm is done. 23 The second matter is the general interest charge provided for in the legislation. Those provisions are inconsistent with the exercise of a discretion that would interfere with the uniformity of the application of the administrative penalties. Where a taxpayer has had the benefit of a shortfall amount, or the Commissioner is deprived of such an amount, the payment of interest by the Taxpayer compensates the Commissioner for any harm that might have been suffered. That being so, it is clear that, whether or not the Commissioner suffers a financial detriment by reason of the fact that there is a shortfall amount has nothing to do with the imposition of administrative penalties or their remission. 24 It must follow, therefore, that, for the purposes of the exercise of the discretion to remit, it can be of no consequence whether a taxpayer's false statement was detected before the Commissioner allowed or paid an input tax credit to a taxpayer, on the one hand, or whether, on the other hand, the Commissioner detected the overpayment after an input tax credit had been paid and recovered the amount, together with an amount in respect of the general interest charge. 25 The general interest charge must be taken to be an accurate approximation of the loss suffered by the Commissioner for not having received a relevant amount or for having paid an amount that should not have been paid. The Commissioner will be compensated for any harm, if any harm has been occasioned. It therefore does not matter, in the context of the exercise of the discretion to remit a penalty, whether or not any harm has been done. The mere fortuity that a false statement has been detected by the Commissioner before any harm is done is a matter that may not be taken into account in the exercise of the discretion to remit the penalty. 26 The ultimate conclusion of the primary judge on the relevant question of law raised by the appeal was correct. However, it is by no means clear that her Honour correctly construed the Tribunal's reasoning. There was no basis for her Honour, in effect, to substitute her own decision on the matter under review by the Tribunal. The matter should have been remitted to the Tribunal for consideration of the question of whether any part of the penalty should be remitted on the basis that the outcome is harsh, having regard to the particular circumstances of the Taxpayer. 27 Accordingly, the appeal should be allowed in part. In addition to the order made by the primary judge, there should be an order that the matter be remitted to the Tribunal for determination, according to law, of the review before it. The parties agreed that there should be no order as to the costs of the appeal. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Spender, Ryan & Emmett. Associate: Dated: 8 April 2008 Counsel for the Appellant: Mr R W Gotterson QC, Mr C D Coulsen Solicitor for the Appellant: McInnes Wilson, Lawyers Counsel for the Respondent: Mr R Derrington SC, Mr P Looney Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 22 February 2008 Date of Judgment: 8 April 2008