Hirere Pty Ltd as Trustee for Vivien's Unit Trust v Chief Commissioner of State Revenue [2004] NSWADT 251

CITATION: Hirere Pty Ltd as Trustee for Vivien's Unit Trust v Chief Commissioner of State Revenue [2004] NSWADT 251 DIVISION: Revenue Division APPLICANT PARTIES: Hiere Pty Ltd as Trustee for Vivien's Unit Trust RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 046010 HEARING DATES: 10/09/2004 SUBMISSIONS CLOSED: 09/10/2004 DATE OF DECISION: 11/03/2004

BEFORE: Verick A - Judicial Member APPLICATION: Taxation Administration Act - liability to pay penalty tax MATTER FOR DECISION: Principal matter Administrative Decisions Tribunal Act 1997 Income Tax Assessment Act 1936 (Cth) LEGISLATION CITED : Pay-roll Tax Act 1971 Taxation Administration Act 1953 (Cth) Taxation Administration Act 1996 CASES CITED: REPRESENTATION: N P Wickenden, agent P Gormly, barrister ORDERS: The objection decision is set aside and the matter remitted to the respondent to give effect to the decision set out in paragraph 32.

Reasons for Decision Background 1 The applicant seeks a review of an objection decision made by the respondent in relation to pay-roll tax assessments for years ended 30 June 2000, 30 June 2001, 30 June 2002 and 30 June 2003 issued by the respondent pursuant to the respondent's powers found in the Pay-roll Tax Act 1971 (the PT Act). 2 In essence, the issue before the Tribunal is whether the applicant is entitled to a further remission of the penalty tax included in these assessments. 3 The documents lodged in the Tribunal pursuant to s 58 of the Administrative Decisions Tribunal Act 1997 (ADT Act) and the following documents submitted by the applicant were before the Tribunal: i) Extract from the applicant's accountants' Practice Management System highlighting diary entries for time spent in compiling the information to assist the respondent to make the relevant assessments; ii) Payroll tax summary spreadsheet dated 1 July 2003; iii) A hand written file note dated 15 April 2003 from the applicant's accountants' files which listed matters for action arising from a meeting with Kevin Smith, director of Hirere Pty Limited; and iv) Applications for registration for pay roll tax prepared by the applicant's accountants to register the applicant in Victoria, Queensland and Western Australia. 4 In addition, the respondent lodged written submissions which set out the following factual background: "4 By letter dated 17 July 2003 the Chief Commissioner of State Revenue informed Hirere Pty Ltd of an intended investigation by the OSR to ensure compliance by the company of the P/T Act. With that letter was a payroll tax questionnaire for the taxpayer to complete and return within 14 days from the date of the letter. 5 By letter dated 31 July 2003 the applicant returned the necessary response and an application for registration of payroll tax dated 31 July 2003. Included with this letter was a schedule calculated by the applicant of estimates of payroll tax for the years ending 30 June 1994 to 2003. The applicant acknowledges outstanding payroll tax obligations for 11 years June 1994-2003. 6 On 6 August 2003 the Commissioner issued Notices of Assessment for payroll tax to the applicant for the 4 years ending 30 June 2000 – 2003, along with interest and penalty tax for each of those years," 5 The respondent's assessments included penalty tax and interest. Penalty tax of 25% of the amount of unpaid payroll tax was included in the assessment under s 27 of the Taxation Administration Act, 1996 (TA Act) but under s 29 it was reduced by 20%. Interest of 12.78% per annum on a daily basis was included in the assessments, which was calculated on the basis of the market rate component (4.78%) and the premium component of 8% under s 22 of the TA Act. 6 On 19 September 2003 the applicant lodged an objection against the assessments seeking remission of the penalties imposed in full or failing that in part. On 23 December 2003, the respondent disallowed the objection. The applicant entered into an instalment arrangement to pay the amount assessed and has since paid the full amount due under the assessments. The applicant lodged an application for review of the objection decision to the Tribunal on 20 February 2004. Legislative Framework 7 The assessments under review are pay-roll tax assessments. The applicant accepts its pay-roll tax liability under the PT Act but disputes the imposition of the penalty tax under the provisions of the TA Act. 8 The TA Act in 1996 introduced uniform provisions with respect to the administration and enforcement of taxation laws administered by the respondent. So far as it is relevant for purposes of this application, the TA Act contains provisions in Part 5 Division 2 to allow the respondent to impose a penalty tax in addition to the amount of tax unpaid and any interest imposed by the respondent. 9 A taxpayer is, under s 26 of the TA Act, liable to pay penalty tax if a tax default occurs. The term "tax default" is defined in s 3 of the TA Act as follows: " tax default means 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." 10 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 PT Act, a taxation law to which the provisions of the TA Act apply. 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 is increased under s 27(2) to 75% of the amount of tax unpaid. The respondent may, however, determine under s 27(3) that no penalty tax is payable by a taxpayer if the respondent 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 taxpayer's control (or if a person acted on behalf of the taxpayer, because of circumstances beyond either the person's or the taxpayer's control) but not amounting to financial incapacity. 11 The penalty tax provisions also direct that the penalty tax determined under s 27 is to be reduced under s 28 by 80% if, before the respondent informs the taxpayer that an investigation relating to the taxpayer is to be carried out, the taxpayer discloses to the respondent, 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 a disclosure during the investigation, the penalty tax imposed under s 27 is reduced by 20% under s 29. 12 Under s 30 the penalty tax determined under s 27 is to be increased by 20% if, after the respondent has informed the taxpayer that an investigation is to be carried out and before the investigation is completed, the taxpayer took steps to prevent or hinder the respondent from becoming aware of the nature and extent of the tax default in whole or part. 13 In addition to these specific penalty tax remission provisions, the respondent is given under s 33 a very broad power to, in such circumstances, as the respondent considers appropriate, remit penalty tax imposed by any amount. The submissions 14 Although the objection is in respect of imposition of interest and penalty tax, the applicant's case is essentially directed to the imposition of the penalty tax. The applicant accepts that s 28 does not apply to its case. The applicant submitted that, in addition to the remission made by the respondent under s 29 for the cooperation given in providing the information required by the respondent, there are additional circumstances for the respondent to exercise his broad power of remission found in s 33 and make a further remission of the penalty tax imposed. 15 The applicant objected to the assessments on the grounds that the respondent should exercise his discretion to remit the penalties included in full or, failing that, in part. The applicant's objection indicated that there were factual matters that warranted the exercise of the discretion. In particular, the applicant's accountants who had lodged the objection on behalf of the applicant stated that their "firm had identified the issue of outstanding payroll tax before the investigation began". The accountants in their letter of objection said they had on 1 May 2003 "began the process of compiling the necessary information to make a full disclosure to the NSW Office of State Revenue providing sufficient information to enable the nature and extent of the payroll tax default". 16 Further the applicant's accountants in the objection drew the respondent's attention to two other matters. Firstly, that "the oversight of the payroll tax liability seems to have arisen due to confusion about the treatment of two specific items of remuneration", which related to payments to managers which was separately identified as "management fees" rather than as wages and the non inclusion of superannuation contributions. Secondly, the applicant's liability to payroll tax became significant during the period 1 July 2000 to June 2002 when the directors were focused with the introduction of the Goods and Services Tax (GST), which the applicant submits "required major reconfiguration of Information Technology systems of the business which resulted in major disruption to accounting systems of the business". 17 At the hearing, the accountants produced copies of documents from their files to demonstrate that the applicant had instructed them to proceed to disclose to the respondent details to enable the respondent to make the necessary pay-roll tax assessments. The documents included diary entries for time spent in compiling the information, a pay-roll tax summary spreadsheet date-stamped 1 July 2003, a hand written file note dated 15 April 2003, which indicated certain matters relating to the applicant's pay-roll liability that needed action, and copies of applications for registration for pay-roll tax in Victoria, Queensland and Western Australia. 18 The respondent submits that the discretion found in s 33 "is a general and the way it is exercised depends on the facts surrounding each matter" and suggested "the following parameters" (as a general guide and should not be considered as prescriptive): "(a) There must be exceptional circumstances which justify the exercise of the discretion. These circumstances depend on individual facts of each case. (b) Whether all principal tax that is owing and not in dispute has been fully paid. (c) Whether there has been co-operation by the taxpayer in providing relevant information to the Commissioner so as to enable the Commissioner to issue assessments. (d) Whether a remittance of tax has already been given under s 29 for that co-operation. (e) There has been no wilful default by the taxpayer in not paying tax on time and no intentional disregard for the law." 19 In addition, the respondent's submissions included his concern that, if the discretion was exercised in circumstances other than exceptional circumstances, the self-assessment system used in respect of pay-roll tax would be undermined. 20 The applicant's response in relation to the "parameters" suggested by the respondent is as follows. It submits that the facts, which are not in dispute, clearly satisfy the suggested "parameters" in the case of (b) to (e). In the case of (a), it claims that the facts are exceptional as it had almost completed the paper work to inform the respondent of its liability to pay-roll tax for all relevant years when informed of the intended investigation. The fairly complex information was furnished to the respondent within days of the letter informing the applicant of an intended investigation. Reasons for decision 21 The penalty tax provisions found in Part 5 of Division 2 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. The amount of penalty tax payable under these provisions is linked to the culpability of the conduct of the taxpayers. The basic rate is prescribed under s 27(1) at 25% of the tax unpaid. This is 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 is reduced by only 20%. The provisions found in sections 28 and 29 apply as statutory directions 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. 22 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. The only issue before the Tribunal is whether there are any grounds for the exercise of the discretion found in s 33 of the TA Act to make a further remission of the penalty tax included in the assessments. 23 It is not in dispute that the applicant did not make any disclosure before the respondent commenced the investigation. Accordingly, the applicant is not entitled to the concession prescribed by s 28. As the applicant had provided the necessary cooperation, the respondent has given the applicant the benefit of the concession found in s 29. The short question for the Tribunal is whether the applicant is entitled to any further remission of penalty tax under s 33. 24 The provisions of s 33 give the respondent a wide discretion to make remissions, but without any prescriptive formula as to how to apply the discretion. The respondent has not issued any guidelines or rulings as to what the respondent will take into account in exercising this discretion. The respondent has, when pressed to state the policy relevant to this discretion, submitted that it should only be applied in exceptional circumstances where the outstanding tax has been paid, no remission has been allowed under a specific remission provision, there has been no wilful default by the taxpayer in not paying the tax on time and there has been no intentional disregard for the law. 25 The scope of the discretion in s 33 is difficult to fully state but there is some guidance in its application from the whole scheme and policy of the penalty tax regime found in Part 5, Division 2 of the TA Act. A situation could arise which strictly would not fall squarely within the prescribed remission provisions but when considered independently the facts and surrounding circumstances could produce a conclusion that it is an appropriate case for the Chief Commissioner to remit wholly or in part the penalty tax imposed under s27. In my view, the discretion given to the respondent under s 33 is relevant in such cases to ensure that the penalty provisions are applied in a just and equitable manner to all taxpayers. 26 The Commonwealth income tax laws provide for a more complex penalty tax regime for tax defaults. The income tax laws also recognise that penalty tax should be reduced where a taxpayer independently acts to inform the authorities of any tax liability before it is discovered by way of an investigation. Such provisions are found in section 226Z of the Income Tax Assessment Act 1936 (ITAA) which ceased to apply from the 2000/2001 income year and in section 284-225(2) which is found in the current uniform penalties regime in Pt 4-25 in Sch.1 to the Taxation Administration Act 1953(TAA). In addition the Commissioner of Federal Taxation has discretion to treat a disclosure that is made by a taxpayer after the taxpayer has been informed that a tax audit is to be carried out as having been made before the taxpayer was so informed. This discretion is found in section 226ZA of the ITAA, which applies up to 1999/2000-income year, and in s 284-225(5), the current provision found in the TAA. The Australian Taxation Office has issued a taxation ruling (TR 94/6) to explain how several of the penalty tax provisions operate to deal with shortfall penalties in the context of voluntary disclosures. The ruling sets out in paragraph 46A the following circumstances where the discretion to treat a disclosure as having been made before a taxpayer is informed of a tax audit should be exercised: "(a) where, because the tax audit being undertaken has only a limited or narrow focus (such as a record keeping audit, a tax strategy review, a monitoring or watching brief, or an audit of a group of companies where a member of the group which is not the focus of the audit makes a disclosure), the tax shortfall disclosed was not within the scope of the audit as notified to the taxpayer and no detailed enquiries had been commenced into the matter; or (b) where it may reasonably concluded that the taxpayer would have made the disclosure even if the tax audit had not been commenced (such as where a company is undertaking a prudential audit at the time the ATO commences its audit and it could be reasonably concluded that the taxpayer was going to disclose the outcome of the prudential audit irrespective of the tax audit)." 27 The TA Act does not contain any such specific discretion to treat a disclosure made after notification of an investigation as a disclosure made before such a notification. But the TA Act contains a fairly broad discretion in s 33 which can in my opinion be exercised in circumstances where a taxpayer could be unfairly denied the benefit of the 80% reduction in penalty tax rates because of a literal application of the law. As suggested in paragraph 25 above, s 33 allows the respondent to apply the penalty tax provisions to produce a just and equitable result in all cases where a tax default occurs. 28 In the present matter, in disallowing the applicant's objection, the respondent relied entirely on a literal reading of s 28 of the TA Act. The respondent was entitled to do so. But the respondent was also entitled to consider his discretion found in s 33 to deal with the objection. No mention was made to this discretion in his objection decision. The facts of this matter are not in dispute. The applicant had, on 15 April 2003, instructed its accountants to prepare all necessary returns to disclose its pay-roll tax liability to the respondent. On 17 July 2003, when the respondent received notification of an investigation from the respondent, the respondent had largely completed the compilation of the necessary information. The applicant was in a position to lodge on 31 July 2003, less than two weeks after receiving the notification, the following information: "1. Completed payroll tax questionnaire; 2. Completed client registration form; 3. Schedule detailing New South Wales and Interstate wages for the Viven's Unit Trust for the years ended 30 June 1994 to 2003. (Schedule 1); 4. Schedule which includes our calculations of the payroll tax for the years ended 30 June 1994 to 2003. (Schedule 2)." 29 I think there is little doubt that the applicant had embarked on a plan to have its pay-roll tax liabilities in order well before the notification arrived. It had prepared details for a period from 1994 to 2003 when the notification had only sought details for the period for the past five years from date of notification. The applicant has also produced evidence to demonstrate that it has dealt with the revenue authorities in other states where it has operated to have its pay-roll tax liability settled. 30 It is also acknowledged by the respondent that the applicant was cooperative during the investigation and has paid all pay-roll tax and penalties assessed in respect of the relevant years. 31 When all the facts are taken into account in this matter, it can, in my opinion, be concluded that the circumstances are appropriate to warrant the exercise of the broad discretion given to the respondent in s 33. The facts are quite special in this matter and the exercise of the discretion will not create a precedent that can generally be relied upon by taxpayers. The applicant's case is essentially based on the action taken by its independent and reputable firm of accountants to meet its pay-roll tax liability well before the investigation notification was sent to the applicant. There is ample evidence to support the conclusion that the applicant was going to make a voluntary disclosure irrespective of the investigation notification. I should also add that the applicant is a small business that had other distractions, which, on their own, did not justify any remission of penalty tax but did explain the reasons for not attending to its pay-roll tax liability when required under the law. A remission of penalty tax under s 33 will ensure that the penalty tax provisions are applied in this case in a just and equitable manner. 32 Accordingly, I will remit the matter to the respondent, for the respondent to take action to amend the assessments by excluding a further 60% of the penalty tax included in the assessments under s 27(1). As the respondent has under s 29 allowed a remission of 20%, the net result would be that the penalty tax determined under s 27 is to be reduced by 80%.