CITATION: Silverbrook Research Pty Ltd -v- Chief Commissioner of State Revenue [2004] NSWADT 65 DIVISION: Revenue Division APPLICANT PARTIES: Silverbrook Research Pty Ltd RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 036048 HEARING DATES: 27/02/2004 SUBMISSIONS CLOSED: 02/27/2004 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: J Afford, agent RESPONDENT H Roberts, solicitor ORDERS: The objection decision under review is affirmed. REASONS FOR DECISION Introduction 1 This is an application under s 96 of the Taxation Administration Act 1996 (the TA Act) for a review of an objection decision made by the Chief Commissioner of State Revenue (the respondent) dated 15 October 2003 in respect of pay-roll tax assessments for the period 1 March 2001 to 31 May 2003. 2 The applicant's objection was essentially against the inclusion in the assessments of interest and a penalty tax and had sought a remission of both amounts. The respondent in his objection decision rejected the objection and refused to make any remission. 3 The parties have not produced any evidence and rely on the documents furnished to the Tribunal under s 58 of the Administrative Decisions Tribunal Act 1997 (the ADT Act) and both written (with attachments) and oral submissions. Factual background 4 The applicant's business consists of undertaking research and development activities and marketing the capabilities and results internationally. Currently it employs some 130 people in New South Wales. 5 The applicant first registered for pay-roll tax under the provisions of the Pay-roll Tax Act 1971(PRT Act) in November 2000 after the respondent's compliance division officers made inquiries about its pay-roll tax obligations. 6 The applicant's history of lodging pay-roll tax returns and making payment of pay-roll tax, in respect of the relevant period, is found in the following chronology supplied by the respondent: "November 2000 Applicant registered for pay-roll tax 15 December 2000 Assessments issued for each of the financial years ending 30 June 1998-2000, and for July – November 2000. 14 September 2000 Notice of non-payment for August 2001 sent to applicant 15 October 2001 Notice of non-payment for 2 months in last 12 sent to applicant 14 November 2001 Notice of consistent non-payment sent to applicant 14 December 2001 Notice of consistent non-payment sent to applicant 21 January 2002 Notice of consistent non-payment sent to applicant 15 April 2002 Notice of consistent non-payment sent to applicant 18 June 2002 Applicant lodged returns for December 2000, January and February 2001 and paid the tax. Penalty tax was not imposed. All returns from March 2001 remained outstanding 14 August 2002 Notice of non-payment sent to applicant 16 September 2002 Notice of consistent non-payment sent to applicant 11 April 2003 Estimate Assessments issued including penalty tax 22 May 2003 Notice of non-payment sent to applicant 16 June 2003 Legal notice sent to applicant 17 June 2003 Notice of non-payment sent to applicant 19-24 June 2003 Garnishee notices prepared and issued (subsequently withdrawn). At same time payment of $130,000 made by client. 15 July 2003 Estimate assessments issued including penalty tax 11 September 2003 Objection lodged" 7 In addition, the respondent has produced a print copy of the various telephone calls made by the respondent's officers to employees of the applicant to deal with both lodgement of returns and payment of outstanding pay-roll tax. 8 The applicant regards the following factual background as being relevant in determining the objection: "a) The Taxpayer is essentially a relatively small to medium size business that has grown to its current size by increasing its employee level judiciously during the period since incorporation in 1994. The Taxpayer has grown from one employee to around 130 employees over a ten-year period. b) The Taxpayer operates in a difficult field of business. It is a research and development company. It is working in the high technology research of digital technologies and materials science. This is an area that has experienced a severe economic downturn locally and internationally during the past two years. Many of Australia's high profile companies operating in NSW have succumbed to the international climate and have gone into liquidation and around a few thousand employees have been retrenched. Many of the retrenched have been unable to continue their careers in the sciences. c) During the past decade the Taxpayer has operated without the benefit of government grants at either a Commonwealth or State level. d) The Taxpayer primarily employs scientists and engineers. All staff members have been or are residents of NSW. The flow-on benefits from wages paid to employees in NSW continue to positively impact the NSW economy. The taxpayer does not adopt the hiring practices which have recently characterised the technology sector – that of contracting very low cost engineering labour from India to work on projects in NSW. e) The Taxpayer is totally export focussed and derives its operating funds from its successful international endeavours. There is no current Australian market for the capabilities or results of its research and development and as a result, revenues have not been generated from within the region. Therefore, in conducting its business in the international arena, the Taxpayer is very susceptible to international political and economic factors beyond its control. · During the past 12 months in particular, there has been a significant effect on exporting revenue due to the decline in the value of the US dollar which saw the Australian dollar up against the US Dollar 19% over the year to 30 June 2003. · The difficulties caused due to the inability to travel and promote through Asia and North America//Canada during the first half of calendar year 2003 due to SARS epidemic were circumstances far beyond the Taxpayer's control. · The unfortunate timing of the SARS epidemic also overlapped with the tensions and travel restrictions associated with both the long lead up to the war in Iraq and during the war itself. The tensions, build up and travel restrictions in association with the war in Iraq have significantly impacted international business confidence and trade relations for the 2002 and 2003 financial years. · In addition to SARS and the war in Iraq, the Bali Bombing also limited the ability to promote the business through enticing potential customers based in the Northern Hemisphere to visit Australia. · Potential clients, in particular from the USA and UK, have been under travel restrictions during this time of uncertainty and have not been able to visit the Taxpayer's laboratory in Sydney. It has been very difficult to generate business through the promotion of scientific expertise when the Taxpayer's NSW based research facilities and team is logistically inaccessible to clients. f) Like many small to medium business in general, and in particular those who operate with no regular cash assistance from government, the Taxpayer is always very closely managing its cash flow, its GST obligations and the impact of slow paying customers. As noted, the impact of the recent set of international events beyond the Taxpayer's control has made this much more onerous and complicated task. g) During the last 4 years, the Taxpayer has had 4 internal accountants of different skill levels. The Taxpayer's current Finance Manager initiated action to rectify the late-lodgement/payment immediately he became aware of the situation and voluntarily disclosed the liability to your office." Relevant legislative provisions 9 The assessments under review are pay-roll tax assessments. The applicant accepts its pay-roll tax liability under the PRT Act but disputes the imposition of interest and penalty tax under the provisions of the TA Act. 10 The TA Act contains uniform administration and enforcement provisions that apply to other taxation laws administered by the respondent. The PRT Act is a taxation law to which the provisions of the TA Act apply. 11 A taxpayer is under s 21 of the TA Act, liable to pay interest if a tax default occurs. The term "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." 12 In the present matter a tax default occurred because there was a failure by the applicant to pay pay-roll tax in accordance with the requirements of the PRT Act. Interest is calculated under s21 on the amount of pay-roll tax unpaid on a daily basis from the end of the last day for payment until (and inclusive of) the day upon which the tax unpaid 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. In the case of the applicant, the respondent included in the assessments the full amount of interest. 13 The Chief Commissioner, under s 25 of the TA Act, is given a discretion to remit in such circumstances as the Chief Commissioner considers appropriate, the market rate component or the premium rate component of interest, or both, by any amount. 14 In addition to 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. 15 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. 16 There is also a broad power found in s 33 of the TA Act that allows the Chief Commissioner in such circumstances, as the Chief Commissioner considers appropriate to remit penalty tax by any amount. The applicant's case 17 Although the objection is in respect of imposition of both the interest and penalty tax, the applicant's case is essentially directed to the imposition of the penalty tax. The applicant relies on s 28 of the TA Act and submits that it is entitled to a reduction in the penalty tax under that section because the respondent did not inform the applicant that it was undertaking an investigation, the respondent must be taken to have made a voluntary disclosure of its pay-roll tax liability before any investigation. 18 The applicant claims that s 28 should apply because the applicant "has provided the information to the Chief Commissioner in writing in circumstances where there has been no written notification that the Chief Commissioner had commenced an investigation". The applicant submits that "section 28 stands alone and allows the Chief Commissioner no discretion". 19 Alternatively, the applicant considers that it is entitled to a remission of the penalty tax under s 33 of the TA Act. The Chief Commissioner's basis for refusing any remission 20 The respondent's submissions on the relevant provisions of the law are set out in the following paragraphs of the written submissions provided to the Tribunal: "7. Pursuant to section 26 of the TAA a taxpayer is automatically liable to pay penalty tax (in addition to interest) upon a tax default occurring. Pursuant to s.27 TAA, the prime rate for penalty tax is 25%, increasing to 75% if there exists intentional disregard by the taxpayer of a taxation law. Pursuant to sections 28 and 29, the penalty can be reduced for information provided, respectively, before or during an investigation. 8. The applicant submits that section 28 is applicable in this case because no " investigation" was commenced by the respondent, and therefore, the applicant must be taken to have 'voluntarily disclosed' information to the respondent. 9. The respondent agrees that there was no letter sent to the applicant informing the applicant that an investigation had commenced. This was not a matter in which such an investigation was carried out, this does not result in the automatic application of section 28. The respondent submits that section 28 simply does not apply in this case. The relevant section for remission of penalty tax in a matter where there is no relevant "investigation" is s.33 or (s.27 (3)). That section confers a general power on the respondent to remit penalty tax by any amount." 21 In paragraph 12 of its written submission the respondent suggests that "penalty tax should only be remitted in circumstances where: "1. all principal tax that is owing and not in dispute has been fully paid; 2. there has been co-operation by the taxpayer in providing relevant information to the Commissioner so as to enable the Commissioner to issue assessments; 3. such co-operation has occurred within a reasonable time after the information has been sought; 4. there has been no wilful default by the taxpayer in not paying tax on time." 22 In the present matter, the respondent submits, that the facts do not warrant any remission of penalty tax. In particular, the respondent points to the applicant's failure to pay pay-roll tax for "an extensive period" notwithstanding several notices that were sent to the applicant drawing its attention to its liability to pay pay-roll tax and that it would incur interest and penalties if it failed to meet its obligations. The respondent also draws attention to the fact that estimated assessments were raised in April 2003 and in June 2003 and that the pay-roll tax was only paid in June 2003 when garnishee action was taken by the respondent. 23 In conclusion, the respondent submits that a distinction has to be made between a taxpayer who voluntarily disclosed its liability and immediately paid the amount due with a taxpayer "such as the applicant against whom vigorous compliance action has to be taken in order to obtain tax payments which are not in dispute". Reasons for Decision 24 There are two issues before this Tribunal. The first issue is whether the interest or any part of the interest imposed at the premium rate under s 21 of the TA Act should be remitted under s 25 of the TA Act. The second issue concerns the imposition of penalty tax under s 26 of the TA Act and whether there are any grounds to reduce the penalty tax under s 28 or remit the total amount included or any part of it under s 33. The applicant has made no submissions in respect of the first issue and has essentially sought to have the penalty tax reduced on the basis of s 28. 25 The penalty tax provisions found in Part 5 of the TA Act ensure that taxpayers comply with taxation laws when required and also provide some balance in terms of fairness between those taxpayers that comply with the law on a timely basis and those who do not. 26 The provisions provide different rates of penalty tax depending on the level of culpability. Where a tax default occurs, the basic rate is 25% of the amount of tax unpaid under s 27(1). That is increased under s 27(2) to 75% of the amount of tax unpaid if the tax default was caused wholly or partly by any intentional disregard by the taxpayer of a taxation law. Subsection 27(3), however, allows the Chief Commissioner to determine no penalty tax is payable if the Chief Commissioner is satisfied that the taxpayer took reasonable care to comply with the relevant taxation law or the tax default occurred solely because of circumstances beyond the control of the taxpayer but not amounting to financial incapacity. 27 But the rate of penalty tax imposed under s 27 must 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 discloses the information during the investigation, the penalty tax imposed under s 27 must be reduced by only 20%. The provisions found in sections 28 and 29 apply as a statutory direction to the Chief Commissioner and there is no discretion with the Chief Commissioner to ignore or vary the rate to some other rate of penalty tax under these provisions. The Chief Commissioner, however, has a separate and independent power under s 33 to remit the penalty tax that is imposed under Part 5, Division 2, of the TA Act by any amount, in such circumstances as the Chief Commissioner considers appropriate. 28 The only issue in this matter is whether this is a case that falls within the provisions of s 28 of the TA Act. Section 28 applies where a taxpayer "discloses to the Chief Commissioner, in writing, sufficient information to enable the nature and extent of the tax default to be determined" prior to the respondent undertaking any investigation relating to the taxpayer. The applicant accepts that "the penalty tax has been correctly imposed" but claims that it is entitled to a reduction of the 25% penalty tax imposed under s 27(1) of the TA Act to a 5% penalty tax under s 28. 29 The respondent's chronology, which was not challenged by the applicant, sets out some very relevant factual background to assess the applicant's behaviour in attending to its pay-roll tax liability. 30 The applicant lodged returns for financial year ending 30 June 1998-2000 and for July – November 2000 on 15 December 2000. No further returns were lodged until 18 June 2002 when the applicant lodged returns for December 2000, January and February 2000. But all returns for the period from March 2001 to April 2003 remained outstanding notwithstanding several notices and telephone calls from the respondent. The respondent was compelled to issue estimated assessments, which included interest and penalty tax, on 11 April 2003. No payment was made until June 2003 when the respondent issued garnishee notices. 31 When payment was made the respondent obtained further information from the applicant to make adjustments to the estimated assessments, previously issued by the respondent, for the period, March 2001 to June 2002. The assessments containing these adjustments were issued on 15 July 2003 and are the subject of the objection decision in this matter. 32 The factual background provided by the applicant in its objection raises no specific ground nor offers any explanation for not attending to its pay-roll tax liability. The only reason advanced for non-compliance of its obligations for pay-roll tax purposes, given at the hearing of this matter, was its financial inability to make payment of the pay-roll tax that was due. 33 "Financial incapacity" is a ground that is specifically excluded by s 27(3)(b) as a matter that can be taken into account to determine that no penalty tax is payable in respect of a tax default. Policy would also dictate that it is not a ground for any remission of penalty under s 33. 34 The burden in this matter rests on the applicant under s 100(3) of the TA Act to show why the penalty tax imposed in this matter should be remitted. The applicant has, unfortunately, not produced any evidence to demonstrate when any voluntary disclosure was made as required by s 28. On the contrary, the respondent's chronology, which was not challenged by the applicant, sets out a history of complete disregard by the applicant of its pay-roll tax obligations during a very lengthy period of time. Estimated assessments had to be issued to the applicant and some information was only supplied after the respondent issued garnishee notices to recover the pay-roll tax debt. 35 I agree with the applicant, that the respondent did not indicate in writing that he had commenced any investigation into its pay-roll tax liability. But that, by itself, does not bring the applicant's case within the provisions of s 28. The applicant needs to demonstrate that it provided sufficient information to enable the respondent to determine its liability. The applicant has not produced that evidence. The respondent's chronology, notices to the applicant and telephone calls indicate that the respondent did not get that cooperation from the applicant on any timely basis. The assessments that are subject to the objection were only issued when information was provided following the issue of garnishee notices. 36 The applicant has not, in my opinion, discharged the burden placed on it to demonstrate that it had made a disclosure as required by s 28. Section 33 gives a general power to the respondent to make a remission in such circumstances, as the respondent considers appropriate. The burden was on the applicant to show any ground to warrant a remission under s 33. The applicant has also failed to show any other ground that would persuade me to exercise the general power of remission found in s 33. 37 The applicant did not seek to argue before the Tribunal that any part of the interest imposed at the premium rate in this matter should be remitted. There are in any case no grounds before the Tribunal to exercise the discretion found in s 25 to remit the premium rate component of the interest or any part of it in this matter. 38 In the circumstances the objection decision under review is affirmed. 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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.