CITATION: Knight and anor v Chief Commissioner of State Revenue [2008] NSWADT 83 DIVISION: Revenue Division APPLICANTS PARTIES: Melissa Jane Knight Christopher Ronald Tidyman FILE NUMBER: 086002 HEARING DATES: 19 February 2008 SUBMISSIONS CLOSED: 19 February 2008 DATE OF DECISION: 17 March 2008 BEFORE: Verick A - Judicial Member CATCHWORDS: First Home Owners grant - reversal by administrator MATTER FOR DECISION: Principal matter LEGISLATION CITED : First Home Owner Grant Act 2000 Allam v Chief Commissioner of State Revenue [2005] NSWADT 172 Calcaro v Chief Commissioner of State Revenue [2004] NSWADT 158 Elskaf v Chief Commissioner of State Revenue [2006] NSWADTAP 10 CASES CITED: Sabiel v FC of T (1926) R & McG 87 Snow v Chief Commissioner of State Revenue (No.1) [2005] NSWADT 244 Tarak Adasi v Chief Commissioner of State Revenue (unreported decision of the NSW ADT dated 27 September 2004) Tilley v FC of T (1944) 3 AITR 76 APPLICANTS In person REPRESENTATION: RESPONDENT S Benjamin, agent ORDERS: The decision by the Chief Commissioner to impose a penalty of $1400 is set aside. REASONS FOR DECISION Introduction 1 The Applicants are joint owners of a residence situated in Newton, New South Wales ('the property"). The property was purchased pursuant to a contract entered into on 10 April 2003 and settlement occurred in May 2003. 2 The Applicants applied for and were granted on 6 November 2003 a first home owner grant of $7,000 under the provisions of the First Home Owner Grant Act 2000 (NSW) (FHOG Act). Subsequently, that grant was recalled by the Chief Commissioner of State Revenue ("the Commissioner") with a penalty. The grant has been refunded and the only issue in this matter is whether the penalty was properly imposed. Factual Background 3 At the time the property was purchased, the Applicants were resident in Canberra and gainfully employed in Canberra. The Applicants, however, had intended to move to Sydney and occupy the property as their principal place of residence at the beginning of 2004. But Ms Knight "unexpectedly fell pregnant in July 2003". As "Ms Knight was receiving pre-natal care at Canberra Hospital", the Applicants took the decision that "continuity of care was important" and it was in those circumstances not possible for the Applicants to move to Sydney prior to the birth of their daughter. 4 In April 2004, after the birth of their daughter, Ms Knight commenced maternity leave. Unfortunately, Ms Knight, then developed post-natal problems and had to receive specialist medical treatment over a period of some months in Canberra. Their daughter also "developed feeding and sleeping issues" and had to receive medical treatment. Mr Tidyman was also not able to obtain a job in Sydney to facilitate their move to Sydney and he continued with his employment in Canberra as the sole income earner for the family. 5 The Applicants made contact with child care centres in Sydney before their daughter was born but were only able to obtain a place for their daughter in a day care centre in Marrickville in April 2005. When these arrangements were finalised, the Applicants moved to Sydney and occupied the property as their principal place of residence. Ms Knight was able to obtain fulltime employment in Sydney, whilst Mr Tidyman was only able to obtain "casual teaching work". They have continued to occupy and use the property as their principal place of residence since April 2005. 6 When the property was purchased, the Applicants proceeded to, on a temporary basis, rent the property, as they were not intending to move to Sydney until the beginning of 2004. In the application for the grant made on the 22 May 2003, it was clearly stated that they expected to occupy the property by 5 April 2004. 7 The grant was only paid on 6 November 2003. The Commissioner did not explain why there was a delay of almost six months before the grant was paid. 8 The Applicants claim that in December 2003, when their circumstances had changed and they were concerned that they would not be able to occupy the property by April 2004, Mr Tidyman contacted the Commissioner's office. In the telephone call the changed circumstances were brought to the attention of the officer and Mr Tidyman was told that the Applicants "for the foreseeable future need to do nothing more to inform OSR and that at some time in the future the OSR would contact" them "regarding their continued eligibility for the First Home Owner Grant". The Commissioner's representative at the hearing informed the Tribunal that there was no record in his file of the December 2003 telephone call made by Mr Tidyman. 9 The Applicants were never contacted again until 19 July 2007 when the Commissioner, as part of his compliance program, sought to check if all eligibility requirements for the grant had been met. 10 The Applicants responded to the Commissioner's inquiry with an explanation as to why the property was not occupied within 12 months of the purchase. 11 On 3 September 2007 the Commissioner responded by issuing the Applicants an assessment to require them to repay the grant of $7,000 and also imposed a penalty of $1,400. In a letter attached to the assessment the Commissioner stated that: "Information held in this Officer indicates you did not meet the eligibility criteria where: "An applicant will occupy the home as their principle ( sic ) place of residence commencing within 12 months of completion of the eligible transaction" We have reversed the decision to pay you the grant. As a result of this, you must pay the full $7,000 amount to the Chief Commissioner under section 45 of the First Home Owner Grant Act 2000 . The Office of State Revenue has imposed a penalty to the grant amount as you notified our office within the time period." 12 On 10 September 2007, Mr Tidyman on behalf of the Applicants objected to the assessment on the following grounds: "Correspondence received from your Office dated 3 September requests repayment of the First Home Owner Grant and imposes a fine of $1,400. We are unsure as to why a fine has been imposed as your letter states: " The Office of State Revenue has imposed a penalty to the grant amount as you notified our office within the time period ." Firstly, we would like to object to the imposition of a penalty for informing the OSR within the time period. This seems to be a penalty imposed on those who do not inform the OSR. Secondly, we would like to highlight the fact that we informed the OSR twice of our inability to take up residence in our property within 12 months period. I called OSR in December 2003, when it became clear that a move to 107 Darley St Newtown early in 2004, considering the need for continuity of care through the impending birth of our first child, was not possible. The advice I received from your Office at that time was that these circumstances would be reviewed on a case-by-case basis rather than applied against an arbitrary criteria. The officer I spoke to informed me that we may have to outline our reasons for not residing in our property within the stipulated time period or that we may be liable for part-repayment of the grant. At no time was the imposition of penalty mentioned. The second time we informed the OSR was during a telephone conversation between my partner, Ms Knight, and OSR office some months ago, where my partner was informed that we would be required to outline our circumstances, hence our letter dated 25 July 2007." 13 On 17 October 2007 the Commissioner contacted the Applicants to inform them that "the notice we issued on 3 September 2007 under section 45 of the First Home Owner Grant Act 2000 provides an incorrect reason for the imposition of a penalty" and that "a corrected section 45 notice" was enclosed. The corrected part of section 45 notice read as follows: "We have reversed the decision to pay you the grant. As a result of this, you must pay the full $7,000 amount to the Chief Commissioner under section 45 of the First Home Owner Grant Act 2000. A penalty of $1400 has also been imposed because you and or your spouse/de facto did not occupy the home as your principal place of residence within 12 months of settlement or construction, and you did not advise the Office of State Revenue within the required time period." 14 On 5 December 2007, the Commissioner disallowed the Applicants' objection. An application was lodged on 9 January 2008 at the Tribunal for a review of the objection decision made by the Commissioner. Relevant Legislative Provisions 15 There is no dispute that the Applicants were entitled to a first home owner grant under section 7 of the FHOG Act. 16 Part 2 of Division 2 of the FHOG Act requires 5 Eligibility Criteria that an applicant needs to satisfy to obtain a grant. This matter relates only to Criterion 5, the "Residence Requirement", which is set out in section 12 of the FHOG Act. Section 12 at the relevant time provided as follows: "(1) An application for a first home owner grant must occupy the home to which the application relates as the applicant's principal place of residence within 12 months after completion of the eligible transaction or a longer period approved by the Commissioner. (2) If an application is made by joint applicants and at least one (but not all) of the applicants complies with the residence requirement, the non-complying applicant or applicants are exempted from compliance with the residence requirement." 17 The term "residence requirement" at the relevant time was defined in section 3 of the FHOG Act in the following terms: " residence requirement means the requirement that an applicant for the first home grant must occupy the home to which the application relates as the applicant's principal place of residence within 12 months after the completion of the eligible transaction or a longer period approved by the Chief Commissioner." 18 Section 12 of the FHOG Act defines an "eligible transaction". The Commissioner in this matter accepts that the transaction is an "eligible transaction" and that in terms of section 13(5) it was "completed" when the Applicants became entitled to possession of the home under the contract. 19 Section 23 gives the Commissioner a power to vary or reverse a decision to make a grant within 5 years of making the decision. 20 In cases where the Commissioner acting under section 23 of the FHOG Act reverses his decision to give a grant to an applicant, the Commissioner is entitled under section 45(1) to demand repayment by issuing an assessment. In addition, under section 45(2) and (3) the Commissioner is entitled to impose penalties. These provisions are as follows: " 45 Power to require repayment and impose penalty (1) The Chief Commissioner may, by written notice, require an applicant (or former applicant) for a first home owner grant to repay an amount paid on the application if: (a) the amount was paid in error, or (b) the Chief Commissioner reverses the decision under which the amount was paid for any reason. (2) If, as a result of an applicant's dishonesty, an amount is paid by way of a first home owner grant, the Chief Commissioner may, by notice in which repayment is required or a separate notice, impose a penalty not exceeding the amount the applicant is required to repay. (3) If an applicant (or a former applicant) for a first home owner grant failed to make a repayment required under this section or the conditions of the grant, the Chief Commissioner may, by written notice, impose a penalty not exceeding the amount the applicant is required to repay. (4) If an amount is paid in error on an application for a first home owner grant to a third party, the Chief Commissioner may, by written notice, require the third party to repay the amount to the Chief Commissioner." Submissions 21 The Applicants' case was that they had contacted the Commissioner in December 2003 but did not get the correct advice. They also submitted that they had every intention of moving into the premises to be used as their principal place of residence within the given timeframe but due to unforseen circumstances they were unable to fulfil the residence requirement within the timeframe. They have subsequently occupied the property as their principal place of residence and on the advice from their accountants they immediately paid back the grant after they received the assessment notice. 22 The Commissioner submission was as follows: "… a penalty of 20 percent is appropriate and necessary in cases where the applicants did not notify the Chief Commissioner of their failure to occupy and use the property as their principal place of residence within 12 months from the eligible transaction but only admitted that they did not occupy the property when the Chief Commissioner conducted an audit." 23 Reliance was placed by the Commissioner on the following decisions of the Tribunal for his submission: Calcaro v Chief Commissioner of State Revenue [2004] NSWADT 158, Elskaf v Chief Commissioner of State Revenue [2006] NSWADTAP 10, Snow v Chief Commissioner of State Revenue (No.1) [2005] NSWADT 244, Tarak Adasi v Chief Commissioner of State Revenue (unreported decision of the Tribunal dated 27 September 2004) and Allam v Chief Commissioner of State Revenue [2005] NSWADT 172. Findings and Reasons 24 The Tribunal has in a number of decisions including those cited by the Commissioner in this matter dealt with the factors relevant to the imposition of penalty under section 45 of the FHOG Act. Essentially, reliance has been placed on the various factors suggested by the Tribunal in Calcaro v Chief Commissioner of State Revenue. 25 In Calcaro the Tribunal suggested the following factors: "51 … 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 deliberateness of the conduct and 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 co-operation with the authorities; and h) in the case of a natural person, the attitude of the offender." 26 These factors were recommendations made by the Australian Law Revision Commission in Principled Regulation: Federal Civil and Administrative Penalties in Australia (2002) ALRC 95 (in recommendation 29-1) to deal with the imposition of civil penalties under the Commonwealth Trade Practices and Company Laws. Under these laws the penalty provisions are complex and generally deal with fairly sophisticated schemes usually affecting a vast number of the community. 27 The First Home Owner Grant legislation is fairly straightforward and deals with a simple scheme to provide grants to first homebuyers. The above factors, accordingly, should be applied with some caution and necessary modifications when considering penalties under section 45 of FHOG Act. The FHOG Act was originally introduced to encourage and assist home ownership, and to offset the effect of the Goods and Services Tax (GST). The scheme has been continued to assist first homebuyers to acquire properties in a fairly difficult real estate market and to some extent to offset the higher mortgage interest payable on home loans. 28 It is important to note that a penalty under the FHOG Act is akin to a civil fine and is not another tax or an interest payment. (Tilley v FC of T (1944) 3 AITR 76 and Sabiel v FC of T (1926) R & McG. 87) If it were to be a tax or an interest payment the FHOG Act would have prescribed a rate. The penalty allowed under section 45 is up to the amount of the grant. As a penalty is akin to a fine, in imposing a penalty it may not be appropriate to take into account any "opportunity cost". 29 When the legislature gives an administrator a wide power to impose penalties without any prescription, the administrator usually formulates policy guidelines for his or her officers in administering such provisions and for the public at large. Unfortunately, the Commissioner has issued no guidelines or rulings and he seems to apply in cases where there is a failure on the part of an applicant to satisfy the residence requirement, and in the absence of any false statements, a standard 20 percent penalty. 30 The bases on which the Commissioner can impose a penalty are set in sub-sections (2) and (3) of section 45 of the FHOG Act. 31 Subsection (2) penalties can only be imposed where it can be established that "as a result of an applicant's dishonesty" an amount has been paid by way of a first home owner grant. In the notice requiring repayment or a separate notice, the Commissioner is entitled to impose a penalty not exceeding the amount the applicant is required to repay. 32 Sub-section (3) penalties apply in two circumstances. The first circumstance is where the applicant fails to repay the grant required under section 45. The other circumstance where the Commissioner is entitled to impose a penalty is where an applicant fails to make a repayment of the grant under a condition of the grant. 33 Another approach to determine the appropriate penalty under section 45 of the FHOG Act is to categorise cases, depending on the level of culpability, where it is relevant for the Commissioner to consider the imposition of penalties. Factors that need to be taken into account to determine the level of culpability would include: (1) the truthfulness of the original statements made by the applicant in his or her application for the grant; (2) the surrounding circumstance including the intention of the applicant in relation to the occupation and use of the property as his or her principal place of residence at the time when seeking the grant; (3) the reasons for failure to comply with conditions of the grant; (4) whether the applicant has occupied the property as his or her principal place of residence; (5) the candour of the applicant in his or her responses to compliance inquiries; and (6) whether the grant been refunded. 34 The most serious cases are those where a grant is obtained by fraud or by making serious false or misleading statements with a clear intention to disregard the conditions of the grant as set out in the FHOG Act. These cases should attract heavy penalties under section 45. The penalty could be from 50 percent to the full amount of the grant. 35 The next category of cases should include cases where applicants do not take reasonable care or act in a reckless manner when obtaining the grant. These are cases where applicants are clearly aware of their factual situations but proceed to make commitments that they can never fulfil, for example, if an applicant is about to leave the country for business or work and intends to stay outside Australia for a period of time that will not allow the applicant to fulfil the residence requirement but, nevertheless, in his or her application makes the claim that the applicant will satisfy that requirement or any other condition of the grant. This category will also include cases where less serious false or misleading statements are made to obtain the grant. These cases should attract penalties from about 30 percent but not exceeding 50 percent of the grant. 36 The third category of cases are cases where the original intention of the applicant is "frustrated" by circumstances within the control of the applicant and where by choice made by the applicant the conditions of the grant are not fulfilled. These are cases, for example, where an applicant obtains a grant indicating the date for occupation but then, by choice, takes an extended overseas holiday or seeks a job elsewhere in Australia and is not able to fulfil the conditions of the grant. Penalties of 10 percent to 30 percent of the grant would seem appropriate. 37 Cases where applicants are not able to fulfil the conditions of the grant because of circumstances largely or wholly beyond their control (for example illness or where an applicant is required by the employer to perform duties elsewhere in Australia or overseas) and where, for medical or other good reasons, the use and occupation of a property is delayed beyond the 12 months allowed under the FHOG Act should not attract any penalties unless there is a failure on demand to repay the grant. As observed by the President in Elskaf, in this category "none or a minimal penalty may be all that should be imposed". Where there is a failure to repay the grant in this category of cases, a 10 percent penalty of the grant would seem to be appropriate. 38 It is, of course, necessary that all the relevant circumstances should be taken into account in each case to determine the penalty. The following may be factors that would allow a reduction of at least up to 5 percent of the penalty that would otherwise be the appropriate penalty: a) Where an Applicant makes a voluntary disclosure of non-compliance of a condition of the grant to the Commissioner. b) The applicant makes the application on bona fide belief and intention to fulfil the conditions of the grant. c) Where the Applicant gives frank and honest answers to the Commissioner's compliance inquiries. d) There is prompt response to the Commissioner's compliance inquiries. e) Where the grant is repaid soon after a demand is made by the Commissioner. f) The Applicant has occupied the property as his or her principal place of residence at the time when penalties are being considered. 39 Having dealt generally with the penalty regime under the FHOG Act, the Tribunal needs to consider the position of the Applicants. The Applicants have been honest and frank in their dealings with the Commissioner. They, upfront when making the application for the grant in May 2003, told the Commissioner in the application that they would use and occupy the property by April 2004. The circumstances that arose to prevent the fulfilment of this undertaking were essentially the unexpected pregnancy and the birth of their daughter and other medical problems, which were brought to the attention of the Tribunal but for privacy reasons, details are not included in this decision. The explanation given was reasonable and, in my opinion, the reasons would constitute "good grounds" if they were seeking a longer period to comply with the "residence requirement" under section 12 of the FHOG Act. 40 It is most unfortunate for the Applicants that the Commissioner has no record of the telephone inquiry made by Mr Tidyman in December 2003 bringing to the attention of the Commissioner the dilemma the Applicants were than placed in. There is no reason for the Tribunal not to believe that the call was made. In a large organisation such as OSR it is understandable that an applicant may have the misfortune of speaking with a less competent officer and not be provided with the correct advice. The proper advice that ought to have been given to the Applicants at that time was for the Applicants to seek an extension of time to comply with the residence requirement in those circumstances. It is obvious that no such advice was provided to Mr Tidyman. 41 The property was let for a period because the Applicants were initially not in a position to use and occupy the property for at least nine months after the date of purchase of the property. Subsequent events required them to remain in Canberra for a further period of some months. The subsequent events have been fully explained by the Applicants and, as indicated above, the reasons were reasonable and "good" to warrant a longer period to comply with the residence requirement. Although there is no question of any grant for extension in relation to this application, it is not difficult for the Tribunal to make that observation on the facts before it. 42 The Applicants have refunded the grant within a very reasonable period after receiving the assessment. 43 When all the facts and surrounding circumstances are carefully taken into account in this matter, the only conclusion that can be reached in this matter is that this is a case that should correctly fall within the category of cases where no penalty should be imposed. It is also a case where, if the Applicants had received proper advice at the time they made the call to the OSR in December 2003, they may have on the facts obtained an extension of the 12 months period allowed under section 12 of the FHOG Act to comply with the residence requirement. It may still be a proper case for the Commissioner to reconsider that issue independently of this review. Order The decision of the Commissioner to impose a penalty of $1400 is set aside. 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.