CITATION: RVO Enterprises Pty Ltd as trustee for the R M O'Mara Family Trust -v- Chief Commissioner of State Revenue [2004] NSWADT 64 DIVISION: Revenue Division APPLICANT PARTIES: RVO Enterprises Pty Ltd as trustee for the R M O'Mara Family Trust RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 036024 HEARING DATES: 05/11/2003 SUBMISSIONS CLOSED: 12/02/2003 DATE OF DECISION: 04/01/2004 BEFORE: Verick A - Judicial Member APPLICATION: Taxation Administration Act - liability to pay interest - Taxation Administration Act - liability to pay penalty tax MATTER FOR DECISION: Principal matter Administrative Decisions Tribunal Act 1997 LEGISLATION CITED : Pay-roll Tax Act 1971 Taxation Administration Act 1996 CASES CITED: APPLICANT REPRESENTATION: A Abbott, agent RESPONDENT H Roberts, solicitor ORDERS: The objection decision under review is affirmed. REASONS FOR DECISION Introduction 1 This is an application for a review of an objection decision made by the Chief Commissioner of State Revenue (the respondent) in respect of pay-roll tax assessments for the financial years ended 1999, 2000, 2001 and 2002. The matter at issue is whether the respondent should remit the whole or part of the interest and penalty tax included in the assessments for failure to lodge pay-roll tax returns and pay the relevant pay-roll tax when due. 2 With the agreement of the parties, the hearing was dispensed with and this matter proceeded to be considered under s 76 of the Administrative Decisions Tribunal Act 1997 (the ADT Act) on the documents lodged under s 58 of the ADT Act and written submissions and material provided to the Tribunal by the parties. Background 3 The applicant was selected by the respondent as part of a compliance project and issued with a pay-roll tax questionnaire. Based on the information provided by the applicant, the respondent issued pay-roll tax assessments for the financial years ending 30 June 1999, 30 June 2000, 30 June 2001 and 30 June 2002. The assessments included full interest with components of market and premium rates as well as a penalty tax imposed at 20% rate. 4 The applicant, a trustee of a family trust carrying on manufacturing business since 1981, accepted the assessments in respect of its pay-roll tax liability but objected against the imposition of interest and penalty tax in the relevant assessments. The applicant's grounds of the objection were as follows: "1. The Chief Commissioner should have been satisfied that the employer took reasonable care to comply with the law or that the tax default occurred solely because of circumstances beyond the employer's control. 2. In particular the minimum levels for payroll tax were not triggered on a monthly basis but were triggered only when superannuation contributions were made irregularly and by and large in the last month of each financial year. 3. The management, directors and staff of the employer were constantly monitoring the wages paid by the employer in respect of their obligations for workers' compensation, PAYG and payroll tax and such other matters as superannuation guarantee charge and were diligent in paying all the taxes, both state and federal relating to employees. The non-payment of payroll tax effectively in respect of superannuation contributions was an inadvertent oversight. It was not deliberate and as a result no penalty should be payable. 4. The Payroll tax legislation is complex, the circumstances of its payment complex, the introduction of GST in 2000 and the administrative burdens placed on the employer have been so excessive as to put the employer and its staff under impossible pressures and leniency and discretion is warranted. 5. The accounting practice which lodges income tax returns, prepares financial statements and lodges workers' compensation declarations, reviews every year this client to ensure that it complies with all of the federal and state government requirements and the external accounting firm did not discover that the payroll tax was due and payable as a result of the irregular superannuation contribution made to a director. This again was an inadvertent error and warrants remission of penalties. 6. At the time of being advised about the payroll tax, there was complete and absolute co-operation with full disclosure and the payroll tax department has not had to incur any expenditure in audit or other costs of compliance. 7. The employer undertakes henceforth and forever to properly account for payroll tax and the Commissioner should be satisfied in bringing into the taxing fold another employer who will comply with all requirements of the payroll tax department in future. 8. The primary payroll tax has been paid." 5 The respondent disallowed the objection on the grounds that "the circumstances detailed" in the objection did not warrant the remission of either the interest or penalty tax included in the assessments. Relevant legislative provisions 6 The assessments under review are pay-roll tax assessments. The applicant does not dispute its pay-roll tax liability under the Pay-roll Tax Act 1971(the PRT Act) but disputes the inclusion of interest and penalty tax in the assessments under the provisions of the Tax Administration Act 1996 (the TA Act). 7 The TA Act contains uniform administrative and enforcement provisions, which apply to taxation laws administered by the respondent. The PRT Act is a taxation law to which the provisions of the TA Act apply. 8 The legislative scheme to impose interest and penalty tax is found in Part 5, Divisions 1 and 2 of the TA Act. The provisions apply when a 'tax default' occurs. "Tax default" is defined in s 3 of the TA Act and occurs when there is "a failure by a taxpayer to pay, in accordance with a taxation law, the whole or part of tax that the taxpayer is liable to pay". In the case of pay-roll tax, a taxpayer that is liable to pay-roll tax is required by the PRT Act to register within seven days after the end of a month in which the taxpayer commences to pay wages that exceed the fixed threshold. The taxpayer is required to pay the pay-roll tax on a monthly basis. A tax default occurs where there is a failure by a taxpayer to do so. 9 In cases where a tax default occurs, the taxpayer is liable under s 21 of the TA Act to pay interest on the amount of tax unpaid, calculated on a daily basis from the end of the last day for payment until the day it is paid. Under s 22, the interest rate is the sum of the market rate component and the premium component. The market rate component is the Treasury Note yield rate or the rate specified for the time being by order of the Minister published in the Gazette. The premium component is fixed at 8% per annum under s 22(3) of the TA Act. The Chief Commissioner is given discretion under s 25 of the TA Act to remit in such circumstances as the chief Commissioner considers appropriate the market rate component or the premium rate component, or both, by any amount. 10 In addition to including interest, the Chief Commissioner is also entitled under s 26 of the TA Act to impose a penalty tax where a tax default occurs. The amount of penalty tax in respect of a tax default is fixed by s 27(1) of the TA Act at 25% of the amount of tax unpaid. If there has been an intentional disregard by the taxpayer of the relevant taxation law, the penalty tax is increased under s 27(2) to 75% of the amount of tax unpaid. The Chief Commissioner may, however, determine under s 27(3) that no penalty tax is payable if the Chief Commissioner is satisfied that the taxpayer took reasonable care to comply with the taxation law or the tax default occurred solely because of circumstances beyond the taxpayer's control but not amounting to financial incapacity. 11 Further, the penalty tax determined under s 27 of the TA Act is to be reduced under s 28 by 80% if, before the Chief Commissioner informs the taxpayer that an investigation relating to the taxpayer is to be carried out, the taxpayer discloses to the Chief Commissioner, in writing, sufficient information to enable the nature and extent of the tax default to be determined. If, on the other hand, the taxpayer makes such disclosure during the investigation, the penalty tax rate is reduced by 20% under s 29. 12 There is also a broad power found in s 33 of the TA Act that gives the Chief Commissioner the discretion in such circumstances as the Chief Commissioner considers appropriate to remit part or the entire amount of the penalty tax. The applicant's submissions 13 The applicant's case is essentially on the following basis: "The circumstances of this case do not warrant penalties, and accordingly the penalty component of 20% should be reduced to nil. The assessments include interest calculated 12.8884% per annum calculated daily. To the extent that this rate exceeds a commercial rate it includes a penalty component. The penalty component should be remitted. It is submitted that a commercial rate of interest would be no more than the benchmark interest rate used for the purposes of Division 7A of the Income Tax Assessment Act 1936 of 6.05% per annum". 14 The applicant also submits that it "took reasonable care to comply with the law and the tax default arose as a result of inadvertent errors" and that the applicant was not aware of the changes to the PRT Act which brought superannuation benefits as part of the definition of wages. 15 In addition to these submissions, the applicant also claims that it did not deliberately avoid its pay-roll tax obligations and that it was an honest mistake in overlooking its obligations. Respondent's submissions 16 The respondent's summary of submissions is as follows: "12. Interest and penalty tax were imposed in accordance with the legislative scheme. 13. The onus is on the applicant to demonstrate that it or a person acting on its behalf took reasonable care to comply with the taxation law in order to enliven the exercise of discretion in its favour under s. 27(3) of the TA Act. 14. The arguments put forward on behalf of the applicant do not demonstrate reasonable care for the following reasons: (a) The superannuation legislation has been in place since 1996 and is not complex. (b) In 2001 tax year the applicant's total wages exceeded the threshold without the inclusion of superannuation contributions and it still failed to register. (c) There is little evidence provided by the applicant as to record keeping practices and other methods used by either the applicant or the tax agent to comply with the legislation other than the assertions made in the applicant's objection. (d) It cannot be the case that the "reasonable care" test can be satisfied merely by use of an accountant. The legislation contemplates that reasonable care taken by that agent. This must be the correct position from a public policy perspective." 17 The respondent, in his detailed submissions, accepts that reasonable attempts to comply with the PRT Act are "commensurate with all the taxpayer's circumstances including the taxpayer's knowledge, education, experience and skill". But, the respondent submits that, in this case, the applicant has been in business since 1981 and would have been required to comply with various taxation laws over a lengthy period and should have in place "an appropriate record keeping system and other procedure to ensure that the income and expenditure was properly recorded and classified for tax purposes". The applicant, the respondent submits, has claimed that the "management, directors and staff of the employer were constantly monitoring the wages paid by the employer in respect of their obligations for worker's compensation, PAYG and payroll tax" but failed to produce any evidence to demonstrate that it took "reasonable care" to comply with the PRT Act. Reasons for Decision 18 I will first deal with the imposition of interest at both the market and premium rates in this matter. The applicant seeks a remission of the premium component on the ground that it is imposed by way of a penalty and that the circumstances of this case do not warrant penalties. 19 In order to warrant a remission under s 25 of the TA Act, the applicant has the burden under s 100(3) of the TA Act show some special ground or grounds that prevented its compliance with the PRT Act. In this matter, the applicant only attended to its pay-roll tax obligations after the respondent commenced compliance inquiries. The mere payment of the market rate of interest is not sufficient to reflect the culpability in this matter. The market rate component only compensates the government for the loss of funds that it would have received at some earlier point in time if the applicant had properly complied with the laws. The premium component reflects the penalty for the tax default that occurred. 20 The premium component can only be remitted in circumstances where the taxpayer has taken reasonable care to comply with the relevant taxation law or the tax default was due to some circumstance beyond the control of the taxpayer or the person acting on behalf of the taxpayer. The applicant in my view has failed to demonstrate any of these circumstances in this matter. I will deal with "reasonable care" ground more fully in my reasons relating to the imposition of penalty tax. 21 In the case of penalty tax, it is imposed under s 26 where a tax default occurs. There is no dispute in this matter that a tax default did take place. The pay-roll tax was paid and relevant information to determine liability was only provided after the respondent had commenced his compliance inquiries. It concerned liability for a number of years. 22 The provisions of s 27(3) that allow the respondent to remit penalty tax in cases where the taxpayer either takes "reasonable care" to comply with the relevant taxation law or where the tax default occurs solely because of circumstances beyond the control of the taxpayer have not been previously considered either by this Tribunal or the courts. 23 The "reasonable care" standard is central to the penalties regime under the Commonwealth income tax legislation to deal with omission and shortfall cases in the context of self-assessment of income tax. The Australian Taxation Office has issued rulings (for example Taxation Ruling TR 94/4 – Income Tax: Tax Shortfall Penalties: Reasonable Care, Recklessness and Intentional Disregard) to explain the "reasonable care" standard. The ruling provides some assistance in considering the "reasonable care" test in the present matter. In each case, it is essentially a question of fact whether the taxpayer has taken reasonable care in attending to its tax obligations. Factors that would indicate that a taxpayer took reasonable care include reasonable attempts to comply with the tax law, reasonable professional and other inquiries to ensure compliance, reliance on professional advice or on official published views of the tax law. Factors which indicate that a taxpayer failed to take reasonable care include oversight or forgetfulness to meet with obligations, failure to maintain adequate records and procedures to prevent errors from occurring, not seeking professional advice and errors in complying with the law. 24 The above deals with the reasonable care standard in a fairly general manner and as I indicated it is a matter of examining the facts of each case to determine whether a taxpayer has taken reasonable care in attending to its tax obligations. In the present matter, the applicant has been in business for a number of years and has experience in complying with various state and federal taxation laws. The applicant claims that it maintains proper record keeping and has a monitoring system to ensure that it meets with all its taxation obligations. But unfortunately it has not produced any evidence to support that claim nor has the applicant produced any evidence to show how the tax default occurred notwithstanding these processes. 25 Non-compliance of the pay-roll tax obligations in this matter was due to "inadvertent error", complexity of the PRT wage provisions, fluctuation of wages at the end of financial year for presumably income tax purposes, introduction of GST and lack of advice from professionals employed by the applicant. These are not factors that indicate that the applicant took reasonable care to attend to its pay-roll tax obligations. On the contrary, they are factors, which indicate that the applicant failed to take reasonable care. 26 There are accordingly no factors before the Tribunal that warrant remission of the penalty tax under s 27(3). There is also no evidence of any real attempts by the applicant to comply with the pay-roll tax obligations. The tax default also did not occur because of any circumstances beyond the control of the applicant. 27 I agree with the respondent that the applicant has failed to demonstrate that it had either taken reasonable care to comply with the PRT Act or that the tax default occurred solely because of circumstances beyond its control. 28 Because the applicant has co-operated and provided sufficient information to enable the respondent to determine its pay-roll tax liability after it commenced compliance inquiries, the respondent has properly reduced the penalty tax under s 29 by 20%. 29 Finally, I need to consider if there any circumstances that warrant the exercise of the discretion found in s 33 to remit the whole or any part of the penalty tax imposed in this matter. The law does not prescribe any guidelines nor has the respondent issued any rulings as to what circumstances would warrant a remission under s 33. Because "reasonable care" and "circumstances beyond the control" are matters that are to be taken into account under s 27(3), they are not matters that are relevant for a remission of penalty tax under s33. Remission under s 33 would, in my opinion, be only warranted in exceptional and rare circumstances. 30 There are clearly no exceptional or rare circumstances before the Tribunal for me to exercise the discretion found in s 33. There are accordingly no grounds to warrant any further remission of the penalty tax under s 33 of the TA Act in this matter. I will in the circumstances affirm the objection decision under review. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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