CITATION: The Ettamogah Mob Australia Pty Ltd & ors v. Chief Commissioner of State Revenue [2005] NSWADT 22 DIVISION: Revenue Division APPLICANT The Ettamogah Mob Australia Pty Ltd & ors PARTIES: RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 036025 HEARING DATES: 15/07/2004 SUBMISSIONS CLOSED: 08/03/2004 DATE OF DECISION: 02/11/2005 BEFORE: Hole M - Judicial Member APPLICATION: Taxation Administration Act - liability to pay interest - Taxation Administration Act - liability to pay penalty tax MATTER FOR DECISION: Principal matter LEGISLATION CITED : Taxation Administration Act 1996 1. Penalty tax is payable at the reduced rate set out in Section 29 of the Taxation Administration Act 1996 CASES CITED: 2. The Premium component of interest is payable on the assessments 3. The Market rate component of interest is payable on the assessments. APPLICANT REPRESENTATION: C Catt, barrister RESPONDENT I Mescher, barrister ORDERS: 1. Penalty tax is payable at the reduced rate set out in Section 29 of the Taxation Administration Act 1996; 2. The Premium component of interest is payable on the assessments; 3. The Market rate component of interest is payable on the assessments. REASONS FOR DECISION Introduction 1 This application is made on behalf of four companies, which are related being: (a) The Ettamogah Mob Aust Pty Ltd (b) Ettamogah Pub (Albury) Pty Ltd (c) Ettamogah Pub (Campbelltown) Pty Ltd (d) Ettamogah Darling Harbour Pty Ltd as trustee for Ettamogah Darling Harbour Unit Trust. 2 The reference to the Applicant is to the 4 companies as a group. The Office of State Revenue advised the Applicant by letter dated 28 April 2003 that its objections to the interest and penalty tax imposed on the assessment of Pay-Roll Tax had been disallowed. The Applicant seeks a review of the quantum of penalties and interest charged on the basis that the interest charged is unreasonable given the circumstances and the group's eligibility for Pay-Roll Tax concessions. 3 Each of the 4 companies is registered for Pay-Roll Tax. As a group, the companies exceeded the pay-roll threshold in January 1999, and provision is made in the group's financial accounts for Pay-Roll Tax liability, although no payments were made due to a belief that there would be an offset as a State government concession. 4 The Applicant employed a firm of accountants (other than the accountant referred to in paragraphs 4 and 6) in mid 2000 to advise and take any necessary action in respect of franchise activity and strategic tax advice. This included, as the Applicant understood, the making of any proposals or applications for Pay-Roll Tax concessions. The Applicant was advised in late 2000, directly on enquiry to the Office of State Revenue, by an officer of the Respondent that any concession would be a refund of payroll tax, not an offset, and that the tax must be paid first. 5 On 29 August 2000 an accountant, acting on behalf of the Applicant, acknowledged that there was a Pay-Roll Tax debt and sought a payment plan. The assessments at that time did not include a penalty tax. Following correspondence between the accountant and the Office of State Revenue a payment plan in respect of the then outstanding Pay-Roll Tax was agreed. 6 The payment plan permitted the Applicant to pay a lump sum amount, then an amount per month and that a review would be undertaken after 6 months. Following a request for remittance forms the Office of State Revenue advised that the payment of the arrears instalments could be made and:- "There are no remittance slips, please photocopy original assessments indicating that payment should be allocated to this liability." 7 Subsequently payments were made pursuant to this instalment plan up to June 2002 by which time an amount of arrears had been repaid in the sum of $58,000. The correspondence from the Office of State Revenue makes it clear that interest would accrue on the debt at the full rate of interest and that this amount would be added to the total debt. 8 The history of the issue, as set out in the papers submitted by the Respondent, and as described in submissions included:- (a) In May 1998 discussions between various State Government representatives and with Mr Leigh O'Brien the Applicant's representative were held. At these discussions the Applicant received information that led to the belief that Pay-Roll concessions would be available (b) On 22 November 1999 the companies were registered for Pay-Roll Tax, The Client Registration form included each of the four companies and confirmation was returned to the accountant's office (c) On 29 August 2000 the accountant sought, on behalf of the Applicant, a repayment plan (d) On 14 September 2000 assessments were issued for one of the companies for 1999 and 2000 (e) The accountant, on behalf of the Applicant, sought agreement from the Office of State Revenue to pay the assessed arrears over time and submitted a proposal to pay $2,000 per week with a review to take place after 6 months (f) The Office of State Revenue responded requesting evidence of the companies cash flow and a $20,000 payment up front (g) On 24 November 2000 the accountant confirmed that a $10,000 up front payment would be paid, that $8,000 per month would be paid and a cash flow statement would be provided (h) The Office of State Revenue accepted the plan on the basis that $10,000 be paid by 1 December 2000, $8,000 would be paid per month from 15 December 2000, there would be a review in 6 months and all current returns to be kept up to date (i) The accountant responded on the basis that all conditions would be met and the $10,000 would be paid by 6 December 2000. The Office of State Revenue accepted this (j) On request from the accountant that remittance slips be provided the Office of State Revenue responded as set out in paragraph 5 (k) On 11 December 2000 the $10,000 was paid, and thereafter further instalments were made to an accumulated amount of $58,000 up to June 2002. It would appear that if the payment plan in respect of the arrears had been continued on the same basis then the total which would have been expected to be paid would have been $152,000 (l) Final notices of assessment had issued as follows:- (i) Ettamogah Darling Harbour Pty Ltd as trust for Ettamogah Darling Harbour Unit Trust – 21 August 2000 - $49,477.78 (ii) Ettamogah Pub (Campbelltown) Pty Ltd – 24 August 2000 - $12,633.64 (iii) Ettamogah Pub (Albury) Pty Ltd – 21 August 2000 - $14,613.12; and (iv) Ettamogah Mob Aust Pty Ltd – 24 August 2000 - $4,452.09. (m) On 15 and 16 July 2002 an audit was undertaken (n) On 11 February, 2003 Amended Notices of Assessment of Pay-Roll Tax were issued to the Applicant (o) On 10 April 2003 the accountant forwarded Notices of Objection to the Office of State Revenue in respect of the interest, and where applicable the penalty tax, assessed on the amended notices of assessment forwarded to the companies. The Notice of Objection relied on the obtaining of advice from another firm of accountants, the possible eligibility for various concessions and grants (extending to Pay-Roll Tax) and belief that the concessions had been applied for therefore there was no need to continue lodging monthly returns. 9 On 15 and 16 July 2002 the Applicant was audited. This audit was triggered automatically as a result of non-lodgement of a large number of returns. The Applicant co-operated with the Respondent and offered to make further instalment payments. Mr O'Brien, the sole director of 3 of the companies, was present during the audit undertaken by two officers from the Respondent. At that time Mr O'Brien was advised that there was no automatic setoff against Pay-Roll Tax liabilities and that any concessions may only be by formal refund. Mr O'Brien attested that he was told by one of the officers, when he enquired as to whether the Applicant should start paying monies against the outstanding Pay-Roll Tax liabilities: "No, wait until you receive the assessment." 10 At the time of the audit in July 2002 there was already an amount of Pay-Roll Tax outstanding. The payments which were being made, under cover of a copy of original assessments ceased in June 2002. At a later stage further payments were made against outstanding Pay-Roll Tax prior to the assessments being issued. After the assessments issued following the audit a further amount of Pay-Roll Tax was paid. Mr O'Brien believed that the monies that had been paid would have been credited against the Pay-Roll Tax outstanding firstly and, if any money over, then against interest. In any event the monies paid by the time of the audit, pursuant to the payment plan, did not cover the Pay-Roll Tax then outstanding. Interest continued to accrue on the outstanding sum. 11 The Respondent issued Amended Notices of Assessment of Pay-Roll Tax to the Applicant on 11 February, 2003. 12 The Applicant advised the Respondent's solicitor by letter dated 14 October 2003 that the primary tax owing on the liability for Pay-Roll Tax was not disputed. Apart from the payment plan agreed to in December 2000 an informal payment plan appears to have been operating whereby as at 14 October 2003 the Applicant was paying approximately $3,000 per week towards the outstanding Pay-Roll Tax. A plan for repayment of outstanding tax was proposed by the Applicant to the Respondent on the basis that $3,000 per week be paid and that interest be added at the "normal" (sic) rate only as and from the date of the amended assessments in February 2003. 13 Both the Applicant and Respondent agree, as set out in further submissions received on 2 and 3 August 2004, that the amount of Pay-Roll Tax is $408,729.64, that Penalty Tax has been applied in the sum of $82,929.44, Market Rate of Interest in the sum of $35,781.74 and Premium Rate of Interest in the sum of $56,596.04. 14 The payments made by the Applicant against the outstanding amounts were credited by the Respondent. However interest continued to accrue, in the usual manner, as referred to in paragraph 8. 15 The relevant legislative provisions, including Sections 21, 25, 27, 28, 29 and 33 of the Taxation Administration Act 1996 were considered in Chief Commissioner of State Revenue v Incise Technologies P/L & Anor (RD) [2004] NSWADTAP 19 revised – 30/6/2004. This case was extensively referred to by both the Applicant and the Respondent. 16 It is convenient to deal with the three impositions of interest rates included in the Taxation Administration Act 1996 separately:- - penalty rate, which attracts the provisions of Sections 27, 28, 29 and 33 - premium rate, which attracts the provisions of Section 25 - market rate, which attracts the provisions of Section 25. Penalty 17 Section 27(1) provides that the penalty tax be 25% of the unpaid tax. Section 27(2) provides for an increase of the amount where there is intentional disregard by the taxpayer of compliance with obligations; this is not applicable in the subject matter, rather the Applicant believed that all requirements had been complied with and that a concession had been obtained. 18 Section 27(3) allows the Chief Commissioner to determine that no penalty tax is payable if reasonable care has been taken to comply with the taxation law or where the default occurred because of circumstances beyond the control of the taxpayer. The Applicant had obtained advice which appeared to be flawed, this was prior to mid 2000. On discovering that Pay-Roll Tax was payable, the Applicant accepted that tax was due and entered into a payment plan which should have continued whilst further returns should have been lodged in the usual manner as time passed. The Applicant, after discovering the liability, did not comply with the requirements of the taxation law. The Applicant attended to expanding business operations and although compliance was a further business impost, the circumstances of non-compliance were not beyond the group's control. 19 The provisions of Section 27(1) must prevail and accordingly penalty tax is payable subject to any reduction permitted pursuant to other provisions in the Taxation Administration Act 1996. 20 Section 28 permits the reduction of the penalty tax by 80% if disclosure is made before the investigation. In this instance, the disclosure to the Chief Commissioner, as contemplated in Section 28, had been made and assessments had issued to the Applicant which had resulted in a payment plan proceeding. The Applicant was not diligent in attending to lodgement of returns during the period from the assessments up to the time of the audit. This had the effect of triggering the audit undertaken on 15 and 16 July 2002 and then the issue of subsequent assessments. As the Applicant had not disclosed sufficient information to the Chief Commissioner to enable the nature and extent of the tax default to be determined prior to the audit then Section 28 does not apply. 21 Section 29 permits the reduction of the penalty tax by 20% if disclosure is made during the investigation. In this instance during the course of the investigation the Applicant disclosed sufficient information to permit the Chief Commissioner to determine the nature and extent of the tax default. Accordingly the provisions of Section 29 apply. 22 The provisions of Section 33 permit the Chief Commissioner to remit the penalty tax by any amount. 23 In view of the disclosures made by the Applicant and the co-operation of the Applicant during the audit the penalty tax should have been reduced in accordance with Section 29. Premium 24 The Chief Commissioner has a discretion to reduce or remit the premium component of interest as set out in Section 25. 25 The Respondent submitted that the four requirements which must be met before the premium component is remitted are:- (1) all principal tax that has been assessed and not in dispute has been fully paid at the time of the request for remission of interest (2) there has been co-operation by the taxpayer in providing relevant information to the Chief Commissioner so as to enable the Chief Commissioner to issue assessments (3) such co-operation by the taxpayer has occurred prior to any investigation being commenced by the Chief Commissioner (voluntary disclosure) or, at the very least, within reasonable time after requests for information have been made by the Chief Commissioner – i.e. the taxpayer has taken reasonable care; and (4) there has been no wilful default by the taxpayer in not paying tax on time. 26 These are the four cumulative criteria set out in paragraph 62 of Chief Commissioner of State Revenue v Incise Technologies P/L & Anor (RD) [2004] NSWADTAP 19 revised – 30/6/2004 as elucidated in paragraph 63 thereof. 27 The submissions made by the Applicant were that there should be a wider criteria of circumstances which should be taken into account and that the imposition of premium interest should be reserved for serious cases of failure of the taxpayer to take reasonable care. 28 The reasoning provided in Chief Commissioner of State Revenue v Incise Technologies P/L & Anor (RD) [2004] NSWADTAP 19 revised – 30/6/2004 discloses that the four requirements are relevant although there could be other circumstances where it would be appropriate to remit the premium component. 29 At the time of the request for remission of interest on 10 April 2003 the principle tax assessed had not been paid in full. The reliance on advice which was apparently misleading, disclosed as being so prior to "late" 2000, is insufficient to amount to an appropriate circumstance to remit the premium component where the assessed principle tax had not been paid in full. 30 The Applicant had co-operated as envisaged in requirement 2 and the co-operation was sufficient to attract the benefit of requirement 3. The facts do not disclose a wilful default by the taxpayer, rather the facts disclose that the Applicant was under a misapprehension up to mid 2000 and that thereafter significant attempts were made to reduce the debt, although attention to continue lodgement of returns diminished. 31 Since the 4 requirements are accumulative, the outstanding non-payment of the assessed principle tax, does not permit the remission of the premium component. Market 32 Section 25 also provides that the Chief Commissioner may remit the market rate component of interest. 33 The Applicant and the Respondent referred to Trust Co of Australia v Chief Commissioner of State Revenue [2002] NSWADT 21; Olah v Chief Commissioner of State Revenue [2002] NSWADT 22; Monaro Investments Pty Limited as trustee for the Troost Family Trust v Chief Commissioner of State Revenue [2003] NSWADT 234; Anastasovski v Chief Commissioner of State Revenue [2003] NSWADT 270; and Moore v Chief Commissioner of State revenue [2002] NSWADT 49. 34 The market rate component is intended to address the inability of the Chief Commissioner and thus the State to use the assessed tax when it is due and is a recognition that the taxpayer continues to have the use of the tax until it is paid. 35 The remission of the market rate should only be remitted in very exceptional circumstances as e.g. the default is due to the fault of the Respondent or when the circumstances are out of the control of the Applicant. 36 The Applicant was under a misapprehension as to the application of concessions prior to 'mid' 2000 and subsequently there had been a delay in issue of the assessments following audit although the Applicant had not diligently complied with lodgement of returns. 37 These circumstances are not sufficient to be considered as sufficiently exceptional to attract remission of the market rate component. 38 As observed at paragraph 60 of Chief Commissioner of State Revenue v Incise Technologies P/L & Anor (RD) [2004] NSWADTAP 19 revised – 30/6/2004 the market rate component: "…. is a component that could rarely if ever, be waived as otherwise tax would be paid at a devalued amount thereby discriminating against taxpayers who meet their obligations on time." 39 Section 21 provides the manner in which the interest is to be calculated on the outstanding unpaid tax, the interest is calculated in respect of '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 at the interest rate from time to time applying under the[the Act]'. The interest accrues on the unpaid tax while it remains unpaid. The method of application of monies received by the Respondent is to credit the amount paid against the unpaid tax and accrued interest. Mr O'Brien attested that he believed that any payments made would be credited against the outstanding tax initially and that if any further monies were paid then those monies would be credited against the interest accrued, this is not a method provided for in the legislation. 40 I find that: (1) Penalty tax is payable at the reduced rate set out in Section 29 of Taxation Administration Act 1996 (2) The Premium component of interest is payable on the assessments (3) The Market rate component of interest is payable on the assessments. 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.