CITATION: Rauf -v- Chief Commissioner of State Revenue [2005] NSWADT 176 DIVISION: General Division APPLICANT PARTIES: Bilal Rauf RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 043390 HEARING DATES: 17/03/2005 SUBMISSIONS CLOSED: 04/27/2005 DATE OF DECISION: 08/04/2005 BEFORE: Montgomery S - Judicial Member APPLICATION: first home owners grant - reversal of original decision - First Home Owners Grant Act - first home owners grant - reversal of original decision MATTER FOR DECISION: Principal matter LEGISLATION CITED : First Home Owners Grant Act 2000 Taxation Administration Act 1996 Bates v Chief Commissioner of State Revenue [2004] NSWADT 13 Calcaro v Chief Commissioner of State Revenue [2004] NSWADT 158 CASES CITED: Chief Commissioner of State Revenue v Farrington (GD) [2004] NSWADTAP 41 Gregoriou v Chief Commissioner of State Revenue [2003] NSWADT 145 Tomasian v Chief Commissioner of State Revenue [2004] NSWADT 37 APPLICANT REPRESENTATION: In person RESPONDENT S Benjamin, solicitor ORDERS: 1. I affirm the decisions of the Chief Commissioner to: (a) reverse, pursuant to s.23 of the First Home Owner Grant Act 2000, a previous decision made under that Act to pay the applicants a grant of $7,000; and (b) require, pursuant to s.45(1) of the First Home Owner Grant Act 2000, the applicants to repay the grant of $7,000 ; 2. I vary the decision of the Chief Commissioner to impose, pursuant to s.45(3) First Home Owner Grant Act 2000, a penalty of 20% of the grant and in its place imposes a penalty of 15% of the grant (i.e. $1,050.00). REASONS FOR DECISION 1 Mr Bilal Rauf and Ms Shahida Begum Israil lodged an application for a grant of $7,000 under the First Home Owner Grant Act 2000 ("the Act") in relation to a unit known as 4/53 Arab Road, Padstow ("the property"). The contract of sale for the property was dated 27 September 2002. The settlement took place on 8 November 2002. The Office of State Revenue processed the application and the grant was paid on 2 December 2002. The grant was paid in advance subject to compliance with the residency requirement of the Act. 2 Section 7(1)(a) of the Act requires applicants to comply with the eligibility criteria. Section 12(1) contains eligibility criterion 5, which requires the Applicants to occupy the property as their principal place of residence within 12 months after completion of the eligible transaction. 3 On 22 July 2004, the Chief Commissioner of State Revenue ("the Chief Commissioner") issued a notice under section 45 of the Act requiring the Applicants' to repay the $7,000 grant that had been paid, together with a penalty of $1,400; ie a total assessment for $8,400. The assessment was issued on the basis of a statutory declaration by Mr Rauf that neither he nor Ms Israil used the property as their principal place of residence. 4 Mr Rauf and Ms Israil ("the Applicants") lodged an objection to the assessment. The facts are not in dispute. They asserted that they had a genuine intention to reside at the property. They stated that they could not take up residence in the property as required by section 12(1) and use it as their principal place of residence due to financial and health related reasons. The Applicants' objection was disallowed and an application for review was lodged with the Tribunal. Mr Rauf is acting on his own behalf and on behalf of Ms Israil. 5 The issues for determination which are raised in this application are as follows: (a) whether the Chief Commissioner's decision to reverse the provision of the grant to the Applicants and to require repayment was the correct and preferable decision in the light of all of the relevant circumstances; and (b) whether the decision of the Chief Commissioner to impose a penalty of 20% was the correct and preferable decision in the light of all of the relevant circumstances. 6 The Applicants purchased the property with the intention of using it as their principal place of residence. After having settled on 8 November 2002, the Applicants left the property empty until February 2003 in anticipation that they would have sufficient funds to take up occupation. By late January 2003, they still did not have sufficient funds saved to take up residency of the property so they rented the property for six months commencing from 1 February 2003. 7 During February 2003, Ms Israil became pregnant. In March 2003 she was diagnosed with pregnancy related complications and her doctors advised her to take complete bed rest. She took leave from her employment and took rest. During this period she needed the care of other persons and for this reason the Applicants resided with Mr Rauf's parents. Even after she gave birth in November 2003 she experienced some medical difficulties. The Applicants now reside at the property and have done so since 19 February 2005. 8 Ms Israil's medical condition impacted on the Applicants' finances. They contend that if they were required to repay the amount sought it would significantly affect their funds and affect their ability to continue to reside in the property. The Applicants have repaid the assessment in full, including the penalty. 9 The Chief Commissioner's contention is that the Applicants did not meet one of the key criteria under the Scheme, ie taking up residence in the property purchased with the grant and using and occupying it as their principal place of residence. The Chief Commissioner relies on the provision in section 20 (3) of the Act, which provides that if the residence requirement is not complied with, "the Applicants must within 14 days after the end of the period allowed for compliance (a) give written notice of the fact to the Chief Commissioner, and (b) repay the amount of the grant". 10 The Chief Commissioner contends that while there is discretion to approve a longer period for the Applicants to take up residence in the property, that request should be made within the 12 month of the settlement of the property. If the permission were sought after the end of the period of 12 month, then the breach of the condition has already occurred. If the Applicants could not fulfil the conditions of the grant they should have returned the amount within 14 days after the expiry of 12-month period. 11 The Chief Commissioner also contends that the power under section 45(3) of the Act allows the Chief Commissioner to impose a penalty because the Applicants did not notify the Chief Commissioner of non-compliance with the residency requirement. The Applicants had the opportunity of informing the Chief Commissioner about their situation and sought permission to occupy the property. In the event that such permission was not granted, then the Applicants could have returned the grant of $7,000. 12 In determining whether the above decisions of the Chief Commissioner were the correct and preferable decisions, regard must be had to all the relevant facts and the applicable law, including the objects of the Act. 13 There is no dispute that the Applicants did not at any relevant stage reside in the property. The Applicants have stated that at the time they purchased the property they intended to make the property their home. The Applicants submitted that their failure to occupy the property as their permanent place of residence was due to matters out of their control. On this basis it was submitted that the Chief Commissioner's decision was not the correct and preferable decision. 14 I accept the evidence in regard to the Applicants' intentions at the time they made their application and that it was based on a belief that they would reside in the property within 12 months of their purchasing it. Due to unforseen circumstances, which significantly impacted on the ability of the Applicants to commence residency at the property, the Applicants were unable to do so until 19 February 2005. However, the Applicants' intention was not the only basis on which the Chief Commissioner made the grant. As provided in section 20(1) of the Act it was made on the "anticipation of compliance" with the "residency requirements". That is, it was made on the basis that the Applicants would meet these requirements and occupy the property as their principal place of residence before 8 November 2003. Meeting this requirement included residing in the property and it is not sufficient to only have an intention to do so: Chief Commissioner of State Revenue v Farrington (GD) [2004] NSWADTAP 41. 15 The Applicants did not seek an extension of the time in which they were required to occupy the property. I do not agree with their argument that the Act does not make any provision for the need for the Applicants to make a further application for exemption or an extension of that time or limit the time within which such an application may be made. 16 The "residency requirements" of section 12 of the Act was an essential eligibility criterion that the Applicants had to meet in order to qualify for the grant. As the Applicants did not satisfy the "residency requirements", the decision of the Chief Commissioner to give the Applicants a grant was not correct. 17 For these reasons, in my opinion, the Chief Commissioner made the correct and preferable decision when he determined to reverse the decision to pay the Applicants the first home owner grant of $7,000. I make a similar finding in respect of the Chief Commissioner's decision to require the Applicants to repay that grant. 18 In respect of the imposition of a penalty, the Applicants submit that the correct and preferable decision is that no penalty should be imposed or, alternatively, if the Tribunal considers that a penalty ought to be imposed, then a reduced penalty should be imposed. 19 Section 45 of the Act gives the Chief Commissioner the power to request the repayment of the amount of grant paid and the power to impose penalties. The Applicants submit that the power vested in the Chief Commissioner under section 45 of the Act is discretionary in nature. They rely on the decision in Gregoriou v Chief Commissioner of State Revenue [2003] NSWADT 145 as authority for this submission. 20 The Applicants contend that but for the exceptional and grave circumstances they would have commenced residency at the property at an earlier date in compliance with the residency requirement. They argue that the Chief Commissioner's decision has caused them significant further financial hardship and also prevented them from moving into the property sooner than 19 February 2005. To this extent, the decision is contrary to the object of the Act by making their home ownership difficult. 21 In Calcaro v Chief Commissioner of State Revenue [2004] NSWADT 158, Judicial Member Molony made reference to a number of factors which were considered useful in determining whether a discretionary decision to impose a civil penalty was the correct and preferable decision. He stated at paragraph 51: 51 A useful list of relevant factors which a court might take into account in determining the amount of a civil penalty was proposed by the Australian Law Reform Commission in Principled Regulation: Federal Civil and Administrative Penalties in Australia (2002) ALRC 95 in recommendation 29-1. These factors concern the discretionary imposition of civil penalties under Commonwealth Legislation, which given the non-discretionary nature of Commonwealth administrative penalties, are more akin to the discretionary imposition of penalties under the First Home Owners Grant Act . The recommendation said: "Unless unsuitable to a particular provision, in determining the amount of a civil penalty, the courts should take account of all relevant factors, including: (a) the deterrent effect of the penalty; (b) the nature and extent of the contravention; (c) any loss or damage suffered, or gain made, as a result of the contravention; (d) the circumstances in which the contravention took place, including the deliberateness of the conduct and the period over which it extended; (e) whether professional advice had been obtained in relation to the contravention, prior to the breach; (f) whether the person has previously been found by a court to have engaged in any related or similar conduct; (g) the degree of cooperation with the authorities; and (h) in the case of a natural person, the attitude of the offender." 22 The Applicants assert that these are relevant factors to be considered in this matter. They rely on a number of authorities as indications of how the Tribunal has applied the discretion to impose a penalty. In Calcaro the Tribunal considered that the appropriate penalty was 50%. In contrast, in Bates v Chief Commissioner of State Revenue [2004] NSWADT 13 the imposition of a penalty was considered to be premature and unwarranted. In Tomasian v Chief Commissioner of State Revenue [2004] NSWADT 37, I found that the original decision to impose a penalty of 20% was excessive in all the circumstances, and the correct and preferable decision was that a penalty of 10% be imposed. 23 The Applicants submitted that a number of relevant facts should be considered. These included that: (a) at all material times the Applicants intended to reside at the property and did so as of 19 February 2005; (b) the Applicants did not wish to avoid their obligations under the Act but due to unforseen and exceptional circumstances were unable to comply with the residency requirement; (c) the Applicants have not previously ever engaged in similar or related conduct; (d) the Applicants were co-operative and frank in their dealings with the Chief Commissioner; and (e) the Applicants re-paid the grant and penalty as soon as was practicably possible, notwithstanding that they suffered further financial hardship as a result. 24 The Applicants further submitted that the decision to impose a penalty is not based on any fair or reasonable policy that takes into account the circumstances of Applicants. Rather, a general approach has been adopted by the Chief Commissioner whereby the Chief Commissioner immediately imposes a minimum penalty of 20% with little or no regard for circumstances relating to an application for a grant and an inability to comply with any requirements. They argued that the decision is contrary to the object of the Act by making difficult home ownership by the Applicants. 25 The Applicants also contend that the beneficial nature of the Act makes it distinct from the Taxation Administration Act 1996 for the purposes of enforcement. A failure to properly consider the beneficial nature of the Act may lead to the adoption of a practice or policy in respect of enforcement which is inconsistent with the very purpose of the Act. They argue that the First Home Owners Grant Business Rules ("the Business Rules") on which the Chief Commissioner bases penalty decisions provides guidelines for the imposition of a penalty but it fails to indicate the reason as to why particular penalty amounts are set for each category. The penalty amounts are arbitrarily set at certain levels. These penalties are automatically applied when certain facts occur. For instance, if there is a voluntary disclosure by an applicant during an investigation, a penalty of 20% is immediately applied. In this regard, there is no specific explanation of why the amount of the penalty in the instance of a voluntary disclosure during the investigation is set at 20% rather than another amount. 26 The Applicants contend that this has the effect that the Business Rules are inflexibly applied with little or no regard for the particular circumstances of Applicants. This leads to an anomalous result that applicants who obtained the grant, genuinely intended to reside at a property and ultimately did reside at a property, are considered at the same level as applicants who obtained the grant with no intention of residing at a property and purchased a property solely for investment purposes. Such a practical effect of the policy is contrary to the intent and object of the Act. 27 Furthermore, while it is argued that the Business Rules act as a tool for maintaining consistency, such a need can never over-ride the need to ensure that a decision is correct and fairly based. The correctness and fairness of a decision necessarily requires that it be made taking into account all of the relevant circumstances in each case. In this regard, the policy fails to provide for such a process. 28 It is submitted that in light of all of the relevant circumstances, the correct and preferable decision in respect of the penalty is that no penalty should be imposed. In the alternative, it is submitted that a penalty in the amount of 20% is excessive. If the Tribunal considers that a penalty should be imposed as a cost to the public for having use of the grant, then a lesser penalty should be imposed. In this regard, it is relevant that the Applicants were paying an interest rate of 5.39% at the time of the grant. 29 The Chief Commissioner provided written submissions in regard to the rationale for applying a 20% penalty pursuant to section 45(3) of the Act. Reliance is made on the approach taken to enforcement action under the Taxation Administration Act 1996 where a taxpayer default occurs. Under that Act, penalty is applied depending on the level of compliance of the taxpayer or their representatives during the investigations and/or the collection of the tax. The penalty could be up to 90% of the primary tax, depending on the circumstances of each case where the Office of State Revenue ("the OSR") can demonstrate that there was an evasion of tax has occurred. 30 Normally, only an interest component is applied where there is a voluntary disclosure, with penalty being used less regularly. The Chief Commissioner contends that the Act does not provide for both interest and penalty, but only penalty. When a grant recipient fails to meet eligibility criteria and fails to give notice and repay the amount, the Chief Commissioner imposes a penalty. 31 In order to maintain the consistency of applying the penalty, the Chief Commissioner has issued the Business Rules. This document is an internal working document and is not made available for the public. The Chief Commissioner has referred to an extract from the Business Rules, which provides: "The following are guidelines for the imposition of any penalty where there was a failure to meet the conditions of Section 20. Where as a voluntary disclosure an applicant for a first home owner grant makes a repayment required under a legislative condition of the grant: - no penalty is to be imposed; Where, as a voluntary disclosure, an applicant for a first home owner grant makes a repayment required under a legislative condition of the grant outside the 14 day period specified in the legislation: -A penalty of 5% of the grant be imposed as a voluntary disclosure before investigation. This approach is under review within OSR. Where an applicant for a first home owner grant failed to make a repayment required under a legislative condition of the grant and as a result of a "show cause letter" which has issued the Applicants makes an immediate voluntary disclosure: - A penalty of 20% of the grant be imposed as a voluntary disclosure during investigation. Where an applicant for a first home owner grant failed to make a repayment required under a legislative condition of the grant, a "show cause letter" has issued and the Applicants is unable to satisfy the residency requirement or any other eligibility requirement: - A penalty of 30% of the grant be imposed. In any case where it can be established there has been an intentional disregard of the law by an applicant. - A penalty of 100% of the grant be imposed". 32 The Chief Commissioner has delegated the decision making power to impose a penalty to officers who are within the OSR. The Chief Commissioner has outlined the approach that an officer who handles an objection is expected to take. The matters taken into consideration are said to be: 1. whether or not there was a major crisis that the Applicants faced during the 12 months from the date of settling the property and/or prior to the commencement of the investigation; and 2. if there was such a major crisis in the applicant's life or relatives of the applicant(s), did such a crisis disrupt normal course of human activities in their own lives, or did they follow a relatively a steady and routine timetable, that would be expected of a normal person? 3. Given the educational qualification and/or business experience of the applicant(s) and their work or business or worldly experience, is it reasonable to assume that the applicant(s) either knew or ought to have known that the Applicants failed to meet the residential requirement of the grant to which the Applicants had signed up when the applicant(s) applied for the grant? 33 The Chief Commissioner contends that, given that the Act has no provision to apply interest on the amount given to the applicant, the penalty rate should take into account the following: - the duration for which the grant amount was enjoyed by the applicant who knew fully of their inability to meet the residential requirement; therefore an existence of an opportunity cost. This means that if the grant amount had not been available to the applicant, they would have obtained the amount from other sources, which would have cost them an interest amount. - whether or not the property was tenanted during this period and if so whether or not the owner was receiving a rental income at the market rate or a nominal rate; - the time and effort put in by OSR Officers in undertaking the necessary investigation, issuing of assessment and collecting the outstanding debt to OSR; - the need to discourage members of the public who might consider that the "grant" as free money given out by the Government to all first home purchasers, thus ignoring or not paying attention to the residence requirement; - whether or not the applicant provided incorrect information in the application as to the date when the Applicants proposes to take up occupation; - that the resources of the OSR are not infinite. Therefore, the message must be very clear that those who receive the grant and are unable to meet the conditions under which the grant was paid should repay it within the time period stipulated or the least contact OSR and seek advice on how to handle the situation, otherwise the penalty would be imposed. 34 In this case, Ms Israil's pregnancy did not stop Mr Rauf from going about his normal work routine as a solicitor. The Chief Commissioner contends that Ms Israil's condition did not constitute an exceptional circumstance where Mr Rauf had to take long leave to look after her. It did not prevent either of the Applicants from contacting the OSR to inform about their situation and repay the amount during the 12 months and 14 days from the date of settlement of the property. 35 The Chief Commissioner considered that a reduction of 5% of the penalty should apply because the Applicants were cooperative and provided necessary information during the investigation. Otherwise the penalty rate would have been 25%. Given this situation, the option is to apply a penalty at the rate of 20%. The Chief Commissioner says that it would be difficult to apportion the 20% penalty amount and attribute it to various aspects discussed above. He referred to a number of cases that he says strongly support a reasonable and effective level of penalty that takes into account many factors as discussed in Calcaro. 36 The Chief Commissioner also submits that it should be noted that a failure to repay the grant on time means that the person is guilty of an offence under section 20 of the Act. The maximum penalty for this offence is 50 penalty units. With each unit being $110, the offence would have amounted to $5,500. The OSR reserves the right to take this action if the circumstance warrants it. 37 The Chief Commissioner's view is that there is no exceptional reason for reducing the rate of penalty below 20% in this matter and therefore, it is submitted that the 20% penalty should be affirmed. 38 I agree that the decision in Calcaro provides a helpful guide on what factors are to be taken into account when exercising this particular discretion. 39 I note the Chief Commissioner's reference to the Business Rules and the fact that this is an internal working document and is not made available for the public. This is an admission of lack of transparency in the decision making process which in my view is a great cause for concern. I am at a loss to understand why the public should not have access to a document that is used as a basis for decision-making that involves imposition of penalties on citizens of this State. I am at a loss to understand why the Office of State Revenue has resisted the provision of the Business Rules to the Tribunal before this matter. 40 I share the concerns that Mr Rauf has in relation to the manner in which the Business Rules are applied. Lack of transparency increases the possibility that a policy will be inflexibly applied with little or no regard for the particular circumstances of Applicants. It also limits a citizens opportunity to challenge the decision making process or the decision. 41 I agree with Mr Rauf's submission that the manner in which it appears the Chief Commissioner's delegates apply the Business Rules could lead to an anomalous result that an applicant who obtained a grant, genuinely intended to reside at a property, and who ultimately did reside at a property, would be considered at the same level as an applicant who obtained the grant with no intention of residing at a property and purchased a property solely for investment purposes. Such a practical effect of the policy is contrary to the intent and object of the Act. 42 I note that despite my invitation to the Chief Commissioner's representative to provided submissions in relation to the manner in which the decision has been reached that a 20% penalty should apply where there is no exceptional reason for reducing the rate of penalty below 20%, the Chief Commissioner has not provided submissions on this point. 43 In the circumstances, it is my view that the appropriate factors to consider are those outlined in Calcaro. There is a high degree of overlap between these factors and those that the Chief Commissioner and Mr Rauf have submitted should be taken into account. This is also a consistent view that has been taken in recent decisions of this Tribunal. I agree with the Applicants' submission that the facts to which they have referred should be considered. In reaching my decision I have taken these into account. 44 At paragraph 62 of his decision in Calcaro Molony JM stated: "62 The question that then arises is one of the amount of the penalty. Applying the criteria discussed above, the factors relevant to the determination of penalty in Mr Calarco's case are: a) the need to deter others from not complying the conditions of grant; b) the fact that Mr Calarco provided incorrect information as to when he would be occupying the premises in his application to grant; c) the fact that (as I have found) Mr Calarco's initial intention was to live in the premises as his own home at the end of the tenancy; d) the fact that Mr Calarco's original intention was frustrated by his own financial circumstances; e) the opportunity cost factor; f) the fact that Mr Calarco showed little respect for matters of propriety and less attention to detail in his dealings with the Administrator; g) Mr Calarco's failure to be candid with the Administrator and the Tribunal; h) Mr Calarco's straitened financial circumstances." 45 Of the eight factors listed in Calarco, factors (f) and (g) do not apply in this case. In Calcaro the Chief Commissioner imposed on Mr Calcaro a 100 per cent penalty due to the misleading nature of the information provided. The tribunal found that Mr Calcaro showed little respect for matters of propriety, little candour and less attention to detail. Those factors of course are not present in this case. Here, the Applicants have been straightforward with both the Chief Commissioner and with the Tribunal. The penalty in Calcaro was reduced from 100 per cent of the grant to fifty per cent of the grant. 46 In this matter I do not share the Chief Commissioner's view that that Ms Israil's condition did not constitute an exceptional circumstance that should be taken into account. However, I do agree that this situation did not prevent the Applicants, or at least Mr Rauf, from contacting the Chief Commissioner to advise of the Applicants' changed circumstances. I also consider that it is relevant that the Applicants re-paid the grant and penalty as soon as was practicably possible. 47 Nevertheless, I do not agree with the Applicants that no penalty should be imposed. In my view, the decision of the Chief Commissioner to impose a penalty of 20% of the grant is excessive. In the circumstances it is my view that the appropriate penalty is one of 15% of the grant amount i.e. $1,050. The Applicants are therefore entitled to be refunded any amount of penalty that they have paid in excess of $1,050. Orders 1. I affirm the decisions of the Chief Commissioner to: (a) reverse, pursuant to s.23 of the First Home Owner Grant Act 2000, a previous decision made under that Act to pay the applicants a grant of $7,000; and (b) require, pursuant to s.45(1) of the First Home Owner Grant Act 2000, the applicants to repay the grant of $7,000. 2. I vary the decision of the Chief Commissioner to impose, pursuant to s.45(3) First Home Owner Grant Act 2000, a penalty of 20% of the grant and in its place imposes a penalty of 15% of the grant (i.e. $1,050.00). 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.