Administrative Decisions Tribunal New South Wales Medium Neutral Citation: Touma v Chief Commissioner of State Revenue [2012] NSWADT 2 Hearing dates: 21 and 22 July 2011, Final submissions 16 August 2011 Decision date: 16 January 2012 Jurisdiction: Revenue Division Before: S Frost, Judicial Member Decision: Within 21 days of the publication of these reasons, the parties are to bring in short minutes of order to reflect the findings and reasons that follow. Catchwords: Land rich duty - sale of share in company - unencumbered value of land owned by company - tax default - when tax default occurs - whether taxpayer or person acting on behalf of taxpayer took reasonable care to comply with taxation law - whether intentional disregard of taxation law - whether taxpayer took steps to prevent or hinder the Chief Commissioner - onus of proof Legislation Cited: Duties Act 1997 Taxation Administration Act 1996 - s 26, 27, 30, 100(3) Administrative Decisions Tribunal Act 1997 - s 63 Cases Cited: Spencer v The Commonwealth (1907) 5 CLR 418 Category: Principal judgment Parties: Raymond Touma, Janette Touma, Charlie Touma, Maggie Touma, Norman Touma, Donna Touma, Joe Touma, Zakia Touma (Applicants); Chief Commissioner of State Revenue (Respondent) Representation: Counsel J Johnson (Applicants) K Richardson (Respondent) Thomas & Bisley Solicitors (Applicants) Crown Solicitor's Office (Respondent) File Number(s): 106063 Reasons for decision 1REVENUE DIVISION (S FROST (JUDICIAL MEMBER)): On 5 October 2007 (the Relevant Date) the Applicants purchased the only share in a company known as Pendle Hill Developments Pty Ltd (the Company). At the time of purchase of the share, the Company owned a commercial/residential development site in Pendle Hill which the Applicants now concede was worth more than $2 million. The Applicants also concede that that land holding of the Company comprised more than 60% of the unencumbered value of all its property. That rendered the Applicants liable to land rich duty under the then Part 2 of Chapter 4A of the Duties Act 1997 . 2The question is, how much duty is payable? 3The parties agree that duty is payable on the unencumbered value of the land at the time of acquisition of the share in the Company, but they are at odds as to what that value was. The Applicants say it was $2.4 million; the Respondent originally assessed duty on a value of $4.4 million (Exhibit B, p. 1096) but now contends that the proper value was $3.5 million. Resolving that valuation dispute is the first task of the Tribunal. 4The second task is to address the question of penalty. The Respondent has taken the view that penalty of 90% of the duty amount is payable - 75% because the "tax default" resulted from "intentional disregard" of a taxation law; and a 20% uplift because steps were taken to "prevent or hinder" the Respondent in his investigation of the transaction. The Applicants on the other hand submit that they took reasonable care to comply with the taxation law, and that no penalty is payable. The property 5The property is known as 2-12 Civic Avenue, Pendle Hill. On the Relevant Date the property comprised six separate but adjoining lots: * Lots 24, 25, 26, 27 and 28 in Deposited Plan 13009; and * Lot 2 in Deposited Plan 511695. 6The Company purchased all six lots in November 2001 for $2.2 million. The company then made a development application to develop the consolidated site into 57 two-bedroom residential units and six retail/commercial units with 60 car spaces. That development application was granted on 4 February 2005. 7On the Relevant Date the property was the only significant asset of the Company. The sale of the share in the Company to the Applicants 8On 28 June 2007, the single shareholder in the Company, Mr Rachid Touma, sold the only share in the Company to the eight named Applicants by way of a Share Sale Agreement. The Share Sale Agreement settled on 5 October 2007. 9The amounts the Applicants were obliged to pay under the Share Sale Agreement totalled $3,926,445, made up as follows: * $426,445 in a cash payment made directly from the Applicants to Mr Rachid Touma; and * $3,500,000 in a cash payment made from the Applicants to St George Bank, to pay off the Company's debts with that bank. The valuations of the property 10The Applicants rely on a valuation of the property undertaken by Mr Cameron Hubbard of MVS Valuers Australia Pty Ltd. The Respondent relies on a valuation undertaken by Mr Andor Kabok, of the Land and Property Management Authority (LPMA). 11The "unencumbered value" of the property is, by s 23 of the Duties Act, "the value of the property determined without regard to any encumbrance to which the property is subject". Both valuers regard "value" in that definition as representing "market value", which they define identically as: the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. 12I also bear in mind what was said by Griffith CJ in Spencer v The Commonwealth (1907) 5 CLR 418 at 432: The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together. 13In the same case Isaacs J said at 441: We must further suppose both [vendor and purchaser] to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property. 14The valuers agree that the appropriate valuation methodology is the Direct Comparison method, with a Hypothetical Development Approach used as a check method. 15Each valuer used four comparison properties on which to base his valuation of the subject property, but only one comparison property was common to both valuers' reports. This was a property in Wentworthville, a development site sold in May 2007 for $1.6 million. It had approval for 21 apartments and the selling price represented a price of around $76,000 per unit. Both valuers thought that a discount from that "per unit" price was warranted on account of the much smaller scale of the proposed development, the reasoning being that large scale developments carry more risk, and this is reflected in a lower "per unit" value. Mr Kabok's discount for size and scale was 20%, Mr Hubbard's 25%. In addition to that, Mr Hubbard thought a discount of 15% was warranted for location (Wentworthville, he considered, was superior), and 5% for the flood-affected nature of the subject property. In the final analysis, Mr Hubbard's derived "per unit" value, taking these adjustments into account, was $42,000, while Mr Kabok's was $60,000. 16Both men applied similar reasoning and calculations to the remaining comparison properties. It seems (Exhibit 2, p. 18) that there were no development site sales in Pendle Hill itself during 2007, and so the valuers had to analyse sales activity in nearby suburbs. Mr Kabok looked at Wentworthville, Blacktown and Westmead, Mr Hubbard at Blacktown and Auburn. 17The sites that are closest in scale to the subject property are the two sites in Blacktown chosen by Mr Hubbard. They both had approval for 50 units (compared to 63 for the subject property). The sales were reasonably contemporaneous, in October 2007 and December 2006. Their raw price per unit was around $34,000, but after taking into account a 20% premium for "location" (agreed, in principle, by Mr Kabok), Mr Hubbard arrived at a derived value of $39,000 per site in one case and $40,000 in the other. 18The Auburn property, which also sold reasonably contemporaneously (June 2007), provides a less reliable benchmark. The property is only 1127 m in area and the development plan was for only 18 units. Furthermore, Auburn lies several suburbs distant from Pendle Hill and - significantly, in my view - beyond the major centre of Parramatta. For these reasons I decline to place any weight on that part of Mr Hubbard's report that relies on the Auburn comparator. 19Mr Kabok's second comparator is another Wentworthville property, but a small one - 1012 m in area and with approval for only 16 units. It sold after the Relevant Date, in February 2008, with a raw price per unit of almost $70,000. Mr Kabok applied a 20% discount for size, to arrive at a derived value of $56,000. 20His third comparator is a small site of only 993 m - less than one-quarter the area of the subject - which sold in March 2006, some 19 months prior to the Relevant Date. The raw price per unit (40 approved) was $53,000 but after adjustments for size (discount), location (premium) and market movement (discount), he derived a value of $51,000 per unit. 21Mr Kabok's fourth comparator is a site at Westmead. It sold in August 2005, over two years before the Relevant Date, for $1,764,000. Its land area at 2090 m is one-half that of the subject property. The development approval was for only 21 units. Adjustments made by Mr Kabok brought the value per unit from the raw amount of $84,000 to $55,000. 22The range of values arrived at by the valuers is therefore $39,000 to $42,000 for Mr Hubbard (disregarding the Auburn comparator) and $51,000 to $60,000 for Mr Kabok. I consider Mr Hubbard's range the more reasonable one, and I base this on the superior comparability of the Blacktown sites that he used. Mr Kabok's comparators were inferior either because their sales were too old (19 months or 26 months prior to the Relevant Date) or because, in the remaining case, the proposed development (16 units) was of such a significantly smaller scale that a comparison is problematic. That leaves the common comparator (the 21-unit development site in Wentworthville), where the derived values are $42,000 for Mr Hubbard and $60,000 for Mr Kabok. The difference arises in three areas - location (Mr Hubbard applies a 15% discount, Mr Kabok none); size and scale (Mr Hubbard's discount is 25%, Mr Kabok's 20%); and Mr Hubbard's 5% discount for the flood-prone nature of the site. Because Mr Hubbard's assumptions are, in essence, reasonable (albeit different from Mr Kabok's), I adopt Mr Hubbard's figures. 23Having said that, I do not agree with his assertion (Exhibit 2, p. 23) that the valuation of the subject property should fix upon the bottom of his range. Mr Hubbard's first comparator was a sale after appointment of a receiver/manager and, although Mr Hubbard resisted the suggestion, I infer from that fact that the vendor will have been more anxious than merely "willing" (see Spencer ), and the market's knowledge of the full circumstances (which is to be presumed) is likely to have had a bearing on the final price achieved. Conclusion on value 24I conclude that the unencumbered value of the subject property at the Relevant Date was $40,500 (the midpoint of Mr Hubbard's range, after rejection of the Auburn property) multiplied by 63, rounded to $2.5 million. Duty is to be assessed on that value. 25I am mindful of the Respondent's submissions in support of Mr Kabok's valuation of $3.5 million, and in particular (Respondent's Written Submissions at [28]-[31]): * that the Company paid $2.2 million for the property some six years prior to the Relevant Date (when it did not have development approval) and that since then the property has been consolidated into one site with a large development approved, representing the addition of "significant value" to the property in the intervening years; * that the Applicants paid $3.9 million for the acquisition of the only share in the Company; * that the Company appears to have considered the value of the property in June 2007 to have been about $3.5 million; and * that an accountant with the Applicants' accountancy firm expressed the view that the property was worth around $3.5 million. 26Nevertheless, the only expert valuation evidence before the Tribunal is that of Mr Hubbard and Mr Kabok. I take the view that Mr Hubbard's valuation report and reasoning are sufficient to establish the value of the property at $2.5 million as I have indicated. I also note that Mr Hubbard's firm had undertaken a valuation of the property on 25 October 2007, independently of the dispute concerning land rich duty, and had valued the property "with approval in place" at $2.5 million. I place no weight on the notation "exclusive of GST" in that valuation since I take the view that the property, if sold by the Company in that condition on that date, would likely have been sold on the "margin scheme" under the GST law. Penalty tax 27A taxpayer is liable to pay penalty tax under Part 5, Division 2, of the Taxation Administration Act 1996 (TA Act) if a "tax default" occurs. A "tax default" is a "failure by a taxpayer to pay, in accordance with a taxation law, the whole or part of tax that the taxpayer is liable to pay": s 3(1). 28The parties take opposing views on when a "tax default" occurs. The Applicants say that it is a single-event occurrence, while the Respondent says that a tax default continues to occur until the proper amount of tax has been paid. At one stage the Applicants submitted that the single point in time when a tax default occurs is immediately upon the expiry of the 3 month period after the relevant transaction: in this case, immediately after midnight on 5 January 2008. Ultimately, it seems that they settled instead on 5 October 2007, the very day on which the transaction took place. 29The Duties Act at the Relevant Date provided in s 163E: A liability for duty charged by this Part arises when a relevant acquisition is made. 30Section 163I provided: A tax default does not occur for the purposes of the Taxation Administration Act 1996 if duty is paid within 3 months after the liability to pay the duty arises. 31The combined effect of ss 163E and 163I of the Duties Act and the definition of "tax default" in s 3(1) of the TA Act is that a tax default does not occur if all the duty that is payable is paid within 3 months of the making of the relevant acquisition. The corollary is that a failure to pay, within 3 months, the entire amount of duty payable constitutes a tax default. 32On the Applicants' view of the law, there was a once-only tax default, either at some instant of time on 5 October 2007 or immediately after midnight on 5 January 2008. It must follow from this view of the law that when the Applicants paid duty in April 2008 at the share transfer rate (which they now concede constituted an underpayment of duty), that did not constitute a tax default. This is despite the plain fact that on that date in April 2008 there occurred a "failure ... to pay ... the whole or part of tax that the taxpayer is liable to pay". It is also despite the fact that from the beginning of 6 January 2008 until the date of part payment in April 2008, it continued to be the case that there was a "failure ... to pay ... the whole or part of tax that the taxpayer is liable to pay". 33I do not accept the Applicants' view of the law. I consider that a tax default "occurs" upon expiry of the 3 month period after the relevant transaction, but that a tax default continues to "occur" until the correct amount of duty has been paid. 34Should that interpretation be criticised on the basis that it elevates the mere passive continuation of a state of affairs into an "occurrence", that criticism is met with the simple observation that a "failure" for something to occur can result from inadequate action (such as the payment of some, but not enough, duty) just as it can result from inaction (such as the absence of any payment at all). Once it is accepted that the initial "occurrence" of the tax default, as a consequence of the expiry of the 3 month period, results directly from inaction (although inadequate action may have preceded it), there is no reason to suppose that continuing inaction cannot amount to an "occurrence" of the same character of failure. 35Now, s 27(1) of the TA Act provides that the penalty tax amount is 25% of the tax unpaid, but that provision is subject to the other provisions in Division 2. Section 27(2) is one such provision. It says that the Chief Commissioner "may increase" the penalty tax amount to 75% "if the Chief Commissioner is satisfied that the tax default was caused wholly or partly by the intentional disregard by the taxpayer (or a person acting on behalf of the taxpayer) of a taxation law". Also, s 27(3) provides: The Chief Commissioner may determine that no penalty tax is payable in respect of a tax default if the Chief Commissioner is satisfied that: (a) the taxpayer (or a person acting on behalf of the taxpayer) took reasonable care to comply with the taxation law; or (b) 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. 36The other relevant provision in Division 2 is s 30, which provides: (1) The amount of penalty tax determined under section 27 is to be increased by 20% if, after the Chief Commissioner 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 Chief Commissioner from becoming aware of the nature and extent of the tax default in whole or part. (2) For the purposes of this section, a taxpayer takes steps to prevent or hinder the Chief Commissioner if the taxpayer: (a) deliberately damages or destroys records required to be kept under the taxation law to which the investigation relates, or (b) refuses or fails (without reasonable excuse) to comply with a requirement made by the Chief Commissioner under Division 2 of Part 9 for the purposes of determining the taxpayer's tax liability, or (c) hinders or obstructs an authorised officer exercising functions under that Division for that purpose. 37The Respondent's position is that the tax default was caused by the intentional disregard of the relevant provisions of the Duties Act, and that the Applicants took steps to prevent or hinder the Respondent from becoming aware of the nature and extent of the tax default. For that reason the penalty amount for which the Respondent contends is 75% (s 27(2)) increased by 20% (s 30) to a total of 90%. 38At this point it is necessary to explain the factual background in some detail. This background comes largely from the s 58 documents (Exhibit B) and from the witness statements and oral evidence of Mr David McNeice and Ms Elicia Nikolovska. Mr McNeice is the principal of the accounting firm that has acted for the Toumas for around 15 years. Ms Nikolovska is one of Mr McNeice's employees. 39Mr McNeice explained that his firm had not been involved with the Toumas or with the Company in relation to the share sale. He first became aware of the share sale transaction in late 2007 when he was asked to prepare business activity statements for his clients. 40His witness statement gives the following detail (Exhibit 9, without amendment): [5] At the time of the share transfer, the buildings upon the land had been demolished and at the time of the share transfer, the land was vacant land. [6] I received a letter dated 31 st January 2008 from Foteades Solicitors who acted on behalf of the purchasers on the purchase of the shares in the company, Pendle Hill Developments Pty Ltd. This letter raised the issue of the duty payable on the transfer of the shares. [7] In response to the letter, one of my staff, Elicia Nikolovska telephoned the Office of State Revenue and was informed that the Office of State Revenue would accept the Valuer Generals valuation for rating purposes as evidence of the land value for stamp duty purposes. This was on the basis that the land was vacant land. [8] Annexed here to and marked "A" is a copy of the material downloaded from the Office of State Revenue site at a later date. This states as follows: "Note- Where the property is vacant unimproved land, the most recent notice of valuation, issued by the Valuer General for rating purposes, would be acceptable." [9] On the 12 th of February 2008, I wrote to Foteades Solicitors enclosing the land tax schedule with the Valuer General's valuations. This showed the value of the property at $1,464,000. I expressed the opinion to Foteades that in the circumstances, the "share transfer should be exempt stamp duty" (meaning not land rich duty). [10] I formed the opinion that the share transfer did not come within the land rich Provisions based on the Valuer Generals valuations which valued the land at $1,464,000.00. [11] It is my understanding that the share transfer and the share sale agreement were lodged with the Office of State Revenue by Foteades Legal on 14 th April 2008. The Office of State Revenue raised a requisition upon the lodgment of the documents. To the best of my knowledge, the documents are still held by the Office of State Revenue pending the final assessment of duty. [12] I subsequently received a letter dated 18 th April 2008 from Foteades Solicitors requesting the most current balance sheet for the Company plus the last 5 years profit and loss statements of the Company. As far as I am aware, this was the only requisition raised by the Office of State Revenue. [13] Prior to the purchase of the shares I had not carried out any work on behalf of Pendle Hill Developments Pty Ltd. Enquires revealed that no financial records had been prepared for the company. No company records were handed over on the sale of the shares. [14] There was no record of any rental income received. There was no record of any expenditure. We had to attain copies of bank statements, copies of rental income statements from the real estate agents, copies of loan statements from the bank, copies of tax invoices for expenditure over a seven (7) year period and valuations of the depreciable fixtures and fittings prepared by a certified quantity surveyor. This was for a period of seven (7) years. [15] I was overseas from the 18 th May 2008 till 2 nd July 2008. While I was away overseas, Scott Dobbs one of my employees was carrying out some of my work. He prepared some Profit and Loss statements and Balance sheets for Pendle Hill Developments Pty Ltd. [16] I did not have the opportunity of checking the documents before they were sent to Foteades Legal. In my opinion, the documents are not correct and I would not have authorised the sending of the documents. [17] In his letter dated 2 nd July 2008 to Harry Foteades, Scott Dobbs stated that at that time, he had only been able to obtain statements back to July 2004 he also stated that his "Investigation on behalf of our mutual client to gain information to reconstruct depreciation schedules and the rest of the financial information has proved essentially futile." He also stated, "The summation of this matter to date reveals that it is a very complex matter and it may not be possible to meet the requisition of the OSR to accurately generate financial statements on behalf of the company ..." [Remainder of paragraph not read] [18] [Not read] [19] Despite Scott Dobbs assessment of the situation, it was possible with a lot of additional work and research to produce proper accounts for the company. [Remainder of paragraph not read] [20] The Office of State Revenue issued a notice of investigation dated 26 th August 2008 to Norman Touma. The notice of investigation relates to the land rich provisions. The transaction has always been subject of investigation by the Office of State Revenue as a land rich transaction and there has never been any attempt to cover up the nature of the transaction. [21] The notice of investigation addressed to Norman Touma was faxed to me on the 11 th September 2008. [22] On the 22 nd September 2008, I forwarded a reply to the Office of State Revenue. The notice of investigation required the information to be provided by the 16 th September 2008. The information lodged by me did not include the Balance Sheets and the Profit and Loss statements for the past five (5) years as these records did not exist. My letter stated: "Copies of income tax statements and balance sheets will be forwarded on completion". I otherwise provided all the requested information. [23] The matter was then left in abeyance by the Office of State Revenue for approximately eleven (11) months. On the 18 th August 2009, the Office of State Revenue issued a section 72 notice addressed to me. This requested the same information as the notice of investigation dated 26 th August 2008 with the exception that there was one item less. [24] By letter dated 26 th August 2009, I requested an extension of time for compliance to the 30 th September 2009. [25] By email dated 1 st September 2009, the time for compliance was extended to 10am on 22 nd September 2009. [26] By letter dated 8 th September 2009, a substantial volume of material was forwarded to the Office of State Revenue including Profit and Loss Statements and Balance Sheets for 2002 and 2003. [27] On 22 nd September 2009, there was an interview between myself and Rani Sekhar and Fred Inglis from the Office of State Revenue. That interview was held at 10am. The outstanding financial records were still in the process of being finalised. The Profit and Loss statements and balance sheets were emailed to the Office of State Revenue at 4:01pm on the 22 nd September, some 6hrs late. At the time of the interview, I did not have a copy of the share transfer form. Foteades Legal claim that a copy was sent to me by letter dated 22 nd June 2009. That letter does not itemise the documents claimed to have been forwarded to me. As mentioned, I believe that the original share certificate is still held by the Office of State Revenue. [28] The problem with providing the Profit and Loss statements and the Balance Sheets for the previous five (5) financial years arose out of the fact that they simply had not been prepared and did not exist. On the purchase of the shares, the purchaser was not given any financial records capable of being used to prepare the relevant Documentation. [29] [Not read] [30] There is no suggestion that the Financial Statements prepared by me are in any way inaccurate. [31] [Not read] [32] I formed the opinion that the transaction did not come within the land rich provisions based on the fact that the Valuer Generals assessments of the land value was $1,464,000.00. The Office of State Revenue does not dispute this valuation. What it does dispute is that this is the correct method of valuation. At page 1099, Fred Inglis states: "My view. The value of $1,464,000.00 represents the unimproved value of the individual blocks of land. It does not reflect the value of the whole development block plus the value for the development approval." [33] At no time did the Office of State Revenue issue a requisition requiring the applicant to provide a valuation of the land. [34] There is no issue of failing to keep records for a required period of time. The records did not exist until I created them in response to the request from the Office of State Revenue. [35] [Not read] [36] [Not read] [37] [Not read] [38] I deny that there was any failure to co-operate with the Office of State Revenue. 41Mr McNeice's assertion at [5] of his witness statement, about the buildings having been demolished and the land being vacant at the Relevant Date, is wrong. Photographs at page 10 of Mr Hubbard's valuation report (Exhibit 2), taken on 25 October 2007, show that the cottages were in the process of demolition . 42In his oral evidence Mr McNeice said (although there is no such suggestion in his witness statement) that he phoned the Office of State Revenue "several times" about land rich duty. On the contrary, his witness statement indicates that it was not Mr McNeice, but Ms Nikolovska, who discussed the issue with the OSR. Her evidence was that the OSR told her (Exhibit 1, at [3]) that "they would accept the Valuer General's Valuation for rating purposes as evidence of land value for Stamp Duty purposes". To her witness statement she annexed a page downloaded from the OSR website on 17 December 2010, which says: Where the property is vacant unimproved land, the most recent notice of valuation, issued by the Valuer General for rating purposes, would be acceptable. 43This is the basis on which Mr McNeice's firm indicated to the Applicants that duty was payable at the share transfer rate rather than the land transfer rate. 44The letter dated 31 January 2008 from Foteades Solicitors, referred to in [6] of Mr McNeice's witness statement, included this (Exhibit B, p. 875): You will recall our conversations of late last year where we, on behalf of Mr Raymond Touma, sought your direction on the duty payable in the transfer of the shares in Pendle Hill Developments Pty Ltd (a company who, in our limited accounting knowledge, was believed to be land rich). We have done some research and spoken to the Office of State revenue with respect to the purchase and it is their view that given the land value attributable to property owned by Pendle Hill Developments Pty Ltd, that the duty payable is at the transfer of land rate rather than the share transfer rate. 45Mr McNeice responded on 12 February 2008 as follows (Exhibit B, p. 886): The latest valuation of the land is $1,464,000, we have enclosed a copy of the Land Tax Schedule confirming the valuation. In our opinion the additional premium paid over and above the $1,464,000 were for "Land Use Entitlements" that is for the development approval and building approval. As the land valuation of $1,464,000 is less than $2,000,000, in our opinion the share transfer should be exempt stamp duty. 46As Mr McNeice explained in his witness statement at [9], his reference to "exempt stamp duty" was intended to mean "not subject to land rich duty". 47Exactly why Mr McNeice thought that the "additional premium over and above the $1,464,000" - amounting to around $2.5 million - was for "land use entitlements" and should not be included in the land value, remains unclear. He was also unable to explain how an accountant of his experience (over 40 years), in circumstances where his clients paid almost $4 million under a share sale agreement by which they purchased the sole share in a company whose only asset was a development site with approval for the construction of 63 units, could, on the basis of a telephone discussion which his employee had with the OSR (the contents of which were apparently not recorded anywhere), assess that a brief OSR statement relating to "vacant unimproved land" would justify his opinion that land rich duty was not payable. Aside from his assertion that Charlie Touma told him that the land was vacant at the time of transfer (which it was not), there appears to have been no attempt to confirm that the land was in fact vacant at that time, much less "vacant unimproved". 48By the end of January 2008, at the latest, the solicitor acting for the Applicants on the purchase of the share in the Company was querying the correctness of Mr McNeice's opinion that land rich duty was not payable. And yet Mr McNeice's reaction was to do no more than instruct his employee to speak to the OSR and to download an information page from the website. That does not, in my view, amount to the exercise, by Mr McNeice, of reasonable care to comply with the taxation law. 49That disposes of one of the grounds under s 27(3) of the TA Act ("a person acting on behalf of the taxpayer took reasonable care") on which it could be determined that no penalty tax is payable in respect of a tax default. The other ground is that the taxpayer itself took reasonable care to comply with the taxation law. 50It may seem surprising that the discretion in s 27(3)(a) may be enlivened if either the taxpayer or a person acting on the taxpayer's behalf took reasonable care, even if the other did not . While that is the effect of the provision, it seems to me that a decision-maker would in many circumstances be entirely justified in refusing to exercise the discretion if any one of the relevant persons failed to take reasonable care. I am of that view here. In the circumstances, and given that (as I have found) Mr McNeice failed to take reasonable care, I decline to exercise the discretion in s 27(3)(a) of the TA Act in favour of the Applicants. 51The next question concerns the increase in the penalty tax amount to 75% under s 27(2) of the TA Act. This increase resulted from the Respondent's satisfaction that the tax default was caused "wholly or partly by the intentional disregard by the taxpayer (or a person acting on behalf of the taxpayer) of a taxation law". Of relevance to this issue is s 100(3) of the TA Act which provides: The applicant has the onus of proving the applicant's case in an application for review. 52In the face of that provision it is difficult to see how the Applicants could submit, as they did at [28] of their Written Outline of Submissions (AWS), that: The onus of proof lies on the Commissioner where it seeks a penalty. 53In a merits review context it might generally be expected that the decision of the original decision-maker would be affirmed only if the Tribunal, standing in the shoes of that decision-maker, was also "satisfied that the tax default was caused wholly or partly by the intentional disregard by the taxpayer (or a person acting on behalf of the taxpayer) of a taxation law". That would be consistent with s 63 of the Administrative Decisions Tribunal Act 1997 (ADT Act), by which the Tribunal, which is empowered to "exercise all of the functions that are conferred or imposed by any relevant enactment on the administrator who made the decision", is required to make "the correct and preferable decision ... having regard to the material then before it". 54But s 100(3) of the TA Act represents a significant departure from that general position. Plainly, it is not the case that the Tribunal must be positively satisfied of the existence of the "state of mind" circumstance set out in s 27(2) for the decision to be affirmed; otherwise, a taxpayer could simply sidestep s 100(3) by the unsophisticated strategy of declining to offer any evidence of its state of mind at the relevant time. Rather, the position is this. Upon the Commissioner's becoming satisfied as to the existence of that circumstance, and upon the inclusion of the penalty tax amount in the notice of assessment of the taxpayer's tax liability (as required by s 15 of the TA Act), and because of s 100(3), the taxpayer must positively satisfy the Tribunal that the "state of mind" circumstance did not exist. Otherwise the decision under review must be affirmed. That is because, unless the burden of proof is discharged, a decision consistent with the Chief Commissioner's original decision is the only possible decision the Tribunal can make, and is therefore the "correct and preferable" decision. 55On the material before me, I am satisfied that the tax default was not caused wholly or partly by the intentional disregard of a taxation law by Mr McNeice . His behaviour did not amount to intentional disregard of the law; at worst it amounted to intentional disregard of: * advice given by Foteades Solicitors (lawyers) that land rich duty may be payable, and that the OSR thought it was; and * the opinion expressed by Scott Dobbs (an accountant) that land rich duty was payable. 56On that part of the enquiry under s 27(2), the Applicants have discharged their burden. 57On the other hand, I have very little material on which I could satisfy myself that the taxpayer (that is, the eight Applicants, or any of them), or any other person who might have acted on their behalf, did not intentionally disregard the law. This is hardly surprising, since none of the Applicants gave evidence before the Tribunal. I would not have expected any of the female Applicants to be able to provide any worthwhile information to the Tribunal since it appears that the male Applicants, all brothers, are the real decision-makers and the driving force behind the Company's development activities. 58Mr McNeice said that it was Ray, Norman and Charlie Touma, but mostly Ray, who gave him his instructions, and all of them have been surprisingly quiet in these proceedings. If they wanted to show that one of them was the main decision-maker, and that he was the one deciding on duty compliance issues, and that his state of mind was such that he genuinely believed that land rich duty was not payable, or perhaps that he was uncertain about the true position, then they, or he, needed to say so. That is the only way that they could have established that the tax default was not caused by the intentional disregard of the law by that individual. As it is, there is no evidence of the state of mind of any of the taxpayers, and in that event the Applicants have failed to discharge the burden of proving that the 75% penalty rate should not have been imposed. 59I turn now to consider the 20% uplift under s 30 of the TA Act. The essential question is whether the Applicants have discharged the burden of proving that they did not take steps "to prevent or hinder the Chief Commissioner from becoming aware of the nature and extent of the tax default in whole or part". 60The Respondent submits that there are three broad areas of behaviour that mandate the 20% increase in penalty tax. They are: * a lack of co-operation on the part of the Applicants or their representative; * the failure to fully and truly disclose all facts and circumstances while concealing relevant facts; * the knowledge of the Applicants that full duty was payable. 61I do not accept the third of those propositions. Mr McNeice was steadfastly advising (albeit wrongly) that land rich duty was not payable. Foteades Solicitors had not put it any higher than that it may be payable, although they had indicated that the OSR thought it was payable. It is fair to assume that the Applicants had knowledge of the land rich provisions, but it can hardly be accepted that they knew that the provisions applied here when one of their professional advisers was telling them that they did not. 62On the other hand, and in relation to the first two propositions, the Respondent submits that Mr McNeice failed to provide information in a timely manner and failed to respond adequately or at all to notices issued under s 72 of the TA Act requiring specified information to be provided to the OSR. 63Two notices issued by the OSR in reliance on powers under s 72 of the TA Act are particularly important in this context. Both of them were issued on 26 August 2008. The first notice (Exhibit B, p. 4) was issued to the "Public Officer" of the Company, at the address of Mr McNeice's accountancy practice in Wollongong (which was the Company's registered office). Of course it must be observed that the Company was not the taxpayer. This cannot, then, be the document by which "the Chief Commissioner has informed the taxpayer that an investigation is to be carried out ..." (my emphasis). 64The second relevant s 72 notice (Exhibit B, p. 1) was issued to Norman Touma. The Applicants accept (AWS, at [35]) that this is the notice by which "the Chief Commissioner has informed the taxpayer that an investigation is to be carried out ...". 65The notice formally required "that you provide the records listed in Schedule 1" by 16 September 2008. In fact what was listed in Schedule 1 was not only "records", but also certain categories of information, including the Australian Business Number (ABN) of the Company, the dates of acquisition of shares in the Company and details of the calculations or valuations of the land held by the Company. 66Mr McNeice, on behalf of the Applicants, responded to the notice (not, as required, by 16 September 2008, but on 22 September 2008 - Exhibit B, p. 46) with * all of the "information" listed in Schedule 1 to the s 72 notice (with one exception - see below); and * all of the "records" listed in Schedule 1 - again, with one exception. 67The exceptions just noted are: * in relation to the "information" listed in Schedule 1, the notice required "Details of calculations or valuations of other assets used in the determination of the % interest of the land value for duty purposes". Mr McNeice's response was "As per Profit and Loss and Balance Sheet fixtures and fittings and buildings valued at the date of acquisition. Work in progress valued at cost as expenditure incurred". That strikes me as an explanation, rather than "details of calculations or valuations". Moreover, it is not clear how he could make reference to "Profit and Loss and Balance Sheet" when, according to [13] of his witness statement, "no financial records had been prepared for the company"; * in relation to the "records" listed in Schedule 1, the notice required "Copies of detailed Income Statements and Balance Sheets including notes to the accounts for the past 5 financial years of Pendle Hill Developments Pty Ltd". Mr McNeice's response was "Copies of Income Tax Statements and Balance Sheet will be forwarded on completion". 68There is evidence that by August 2008 a set of accounts had been prepared for the Company, at least for the financial years 2002 to 2005 inclusive (Exhibit B, p. 967ff). In fact, Mr McNeice referred to these accounts at [15]ff of his witness statement. There were some professional disagreements between Mr McNeice and his employee Mr Dobbs, and Mr McNeice regarded the accounts as inaccurate and incomplete. The disclaimer to the accounts notes that the firm had not undertaken a full audit of the Company's financial affairs and furthermore there is no suggestion that the Company's directors ever adopted the accounts as correct. Although the Respondent was critical of Mr McNeice for not producing these accounts to the OSR in response to the s 72 notice, I accept Mr McNeice's justification for not producing them. 69However, there are two further points to make about Mr McNeice's provision of information and records to the OSR. The first is the way Mr McNeice responded to the requirement in the s 72 notice to provide "Details of all real property acquired by the landholder and the respective dates when it was acquired". His answer was (Exhibit B, p. 46): * 2 Civic Avenue, Pendle Hill 22 nd November 2001 * DP 24/13009 net land value $130,000 * 4 Civic Avenue, Pendle Hill 22 nd November 2001 * DP 25/13009 net land value $140,000 * 6 Civic Avenue, Pendle Hill 22 nd November 2001 * DP 26/13009 net land value $150,000 * 8 Civic Avenue, Pendle Hill 22 nd November 2001 * DP 27/13009 net land value $165,000 * 10 Civic Avenue, Pendle Hill 22 nd November 2001 * DP 28/13009 net land value $210,000 * 12 Civic Avenue, Pendle Hill 22 nd November 2001 * DP 2/511695 net land value $160,000 * Total Value of Land 22 nd November 2001 - $955,000 70Note that the OSR had not asked how much had been paid for the real property, only to identify it and to specify when it had been acquired. Mr McNeice's response, although carefully referring to "net land value" and "Total Value of Land", created the impression, in my view, that the properties had been purchased for $955,000. It did not, for example, disclose that the properties at the time of acquisition comprised land and buildings , and it did not disclose that the total purchase price was $2.2 million. 71The second point is this. Included within the package of material provided to the OSR on 22 September 2008 was a copy of the Share Sale Agreement (Exhibit B, pp. 60-108). Although the document ends (at pages 107-108) with the execution pages (including the signatures of all eight Applicants), giving the impression that the document is the final version, it is plainly a draft. The front page (p. 60 of Exhibit B) contains as a date " ... June 2007". There are pages missing. Clause 14.10 of Schedule 9 (p. 106) finishes mid-sentence. Of particular significance is Schedule 6 (p. 88), Part 2 of which is as follows: Conditions Precedent to Completion Conditions for the benefit of the Vendor: 1.THAT THE PURCHASER HAVE ORGANISED THE REFINANCE OF THE DEBTS OWED TO ST GEORGE BANK AND OTHERS, IN THE AMOUNTS AS DISCLOSED INTHE ACCOUNTS ATTACHED AS ANNEXURE A, BY THE COMPANY Conditions for the benefit of the Purchaser: [None specified] 72There are no accounts attached as Annexure A, and there is no reference to the quantum of the debt to St George Bank ($3.5 million). 73That version is to be contrasted with the version of Schedule 6 which was produced to the OSR by Foteades Solicitors (Exhibit B, pp. 923-4) in response to a s 72 notice issued on 24 September 2009: Conditions Precedent to Completion Conditions for the benefit of the Vendor: 1.THAT THE PURCHASER SHALL ON SETTLEMENT PAY TO ST GEORGE BANK A SUM OF $3,500,000.00, AS SET OUT IN PART 1 ABOVE, TO DISCHARGE THE LOAN FROM ST GEORGE BANK. 2.THE PARTIES AGREE THAT IF THE SUM PAYABLE TO ST GEORGE BANK IS: (A)LESS THAN $3,500,000.00, ANY DIFFERENCE SHALL BE PAID TO THE VENDOR; AND (B)MORE THAN $3,500,000.00, ANY ADDITIONAL AMOUNTS PAYABLE TO ST GEORGE BANK LIMITED SHALL BE PAYABLE BY THE VENDOR. Conditions for the benefit of the Purchaser: 1.THAT THE VENDOR HAVE ORGANISED THE REFINANCE OF THE DEBTS OWED TO ST GEORGE BANK AND OTHERS, IN THE AMOUNTS AS DISCLOSED IN THE ACCOUNTS ATTACHED AS ANNEXURE A, BY THE COMPANY IN FAVOUR OF A FINANCIAL INSTITUTION AS ADVISED BY THE PURCHASER Conditions for the benefit of all parties: [None specified] 74Why did Mr McNeice not send the final version of the Share Sale Agreement, and Schedule 6 in particular, to the OSR? There are two plausible answers to that question. One is that none of the Toumas had ever provided the final version to Mr McNeice. The other is that they had provided the final version to him but he chose to send only a draft to the OSR. 75The inference is certainly available that the Applicants (or one or more of them) were selective in arming Mr McNeice with information to provide to the OSR in response to the s 72 notice, especially the draft Schedule 6 and the information about "net land value" of the parcels acquired in November 2001. The information provided to the OSR had the real potential to disguise, and to prevent or hinder the Chief Commissioner from becoming aware of, both the "nature" and the "extent" of the tax default. In accordance with s 100(3) of the TA Act, the Applicants needed to prove that the inference that is available should not be drawn. They have failed to do so. Conclusion 76The assessment will be varied so that duty is imposed on an "unencumbered value" of $2.5 million. The rate of penalty tax, at 90% of the tax unpaid, is confirmed, but the quantum will need to be adjusted to take account of the varied value of the property. Order 77Within 21 days of the publication of these reasons, the parties, as agreed, are to bring in short minutes of order to reflect my findings and reasons. ********** 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. Decision last updated: 16 January 2012