The AAT has confirmed that 3 companies, that were in effect owned and controlled by one director, were liable to FBT and 75% administrative penalties over a 4-year period for failing to lodge FBT returns in relation to several luxury cars. The penalties amounted to over $250,000. The resulted in an overall liability of over $620,000.

The problem is a ‘failure to return’ penalty is 75%

The penalty for failing to lodge returns can be harsh. The law obliges the Commissioner to impose an administrative penalty of 75% of the tax not returned. This is the result of s284-75(3) of the TAA Sch1, which creates the liability and s284-90(1), item 7, which sets penalty at 75% of the tax not returned (with no 25%, 50%, 75% stepped penalty for rising culpability as there is for false and misleading statements in returns).

As a result, the Commissioner’s power to remit this penalty is the main avenue for achieving a just result. The Commissioner’s remission power is in s298-20 of the TAA Sch1 and is expressed in terms that provide no guidance or fetter on this power.

The Commissioner discusses both the imposition of this penalty and its remission in his Practice Statement: PS LA 2014/4. He does not explicitly say to his staff (in this PS LA) that the remission power is unfettered. He does, however, outline a number of factors, including avoiding an ‘unjust result’.

Tax agent ‘safe harbour’ doomed to fail

In trying to avoid the 75% penalty, the taxpayers alleged that they were sheltered by the so-called ‘safe harbour’ that can apply when using a tax agent (in s284-75(6) which was previously s284-75(1A)). This was doomed to failure as this safe harbour only gives relief for penalties for making a false or misleading statement (in a return that has been lodged) and not for failing to lodge a return, which resulted in the the Commissioner having to raise the assessment without the benefit of that return.

Whether the Commissioner should remit 75% penalty down?

And so, the taxpayers also contended that the 75% penalty ought be remitted under s298-20. The Tribunal looked at available authority: the Federal Court’s decision in Sanctuary Lakes Pty Ltd v FCT [2013] FCAFC 50, (2013) 212 FCR 483. In that case, Griffiths J said (at pp534-535):

In my view, there is no warrant for reading into the broad discretion conferred by s 298-20 of the TAA 1953 … a requirement that the decision-maker must be satisfied that the outcome is “harsh” for the particular taxpayer in his or her individual circumstances unless penalty is remitted.

It may be appropriate in a particular case to remit a penalty on the basis that the outcome otherwise could be described as “harsh”, but that does not mean that “harshness” should be elevated to an essential element in determining whether or not to remit the penalty under s 298-20.

Rather, the question is simply whether the decision-maker is satisfied having regard to the taxpayer’s particular circumstances that it is appropriate to remit penalty in whole or in part.

The Tribunal then turned its attention to PS LA 2014/4, paras 28 – 45, saying (a little to readily) that it is “satisfied that these examples are consistent with the interpretation of the discretion by Griffiths J in Sanctuary Lakes”. However, its approach was to go through all the factors set out in that Practice Statement, in order to inform itself about the proper exercise of the broad discretion referred to in Sanctuary Lakes.

These factors included: the taxpayers ‘understanding of [their] obligation to lodge’ these returns; whether the failure to lodge was ‘beyond [the taxpayers’] control’; whether a failure to remit would produce an ‘unjust result’ and the level of ‘cooperation during examination’.

The taxpayers alleged a 75% penalty would be an unjust result, but the Tribunal took a different view:

  1. The base penalty rate of 75% is a significant one. Paragraph 38 of the PSLA 2014/4 states that the total amount of penalty and interest charge should be considered to ensure it represents a defendable and reasonable amount.
  2. 8 The applicants contend that 75% is an unjust penalty where the failure to lodge was a result of ignorance of the law. This may be so. However, several actions of Mr Ooi and particularly Mr Goh are indicative of a disregard for the applicants’ FBT obligations rather than ignorance, including:
  • Mr Goh’s unsatisfactory explanation for failing to lodge the FBT returns by 5 September 2014;
  • Mr Ooi failure to follow Mr Goh’s advice to retain a logbook for the relevant motor vehicles; and
  • Mr Ooi’s and Mrs Ching’s retrospective completion of logbooks based on recollection in order to reduce FTB liability.

And, damningly, the Tribunal concluded as follows.

  1. Mr Goh was fully aware of the applicants’ obligation to lodge their FBT returns by 5 September 2014. However, he elected not to comply with the obligation. There is no contention that the letter of 8 August 2014 did not give the applicants adequate time to lodge their FBT returns. Mr Goh did not seek an extension of time to lodge the FBT returns.
  2. Mr Goh asserts that the FBT returns were not lodged before 5 September 2014 because he did not believe the ATO would accept his calculations. This does not amount to a circumstance beyond the applicants’ control or an adequate reason why he did not file the return.
  3. Mr Ooi states that he was unaware of the applicants’ obligation to lodge the returns because he was reliant on Mr Goh. Despite being “shocked” at the meeting held on 7 August 2014, Mr Ooi, as a company director, failed to take the level of care that a reasonable person in a similar situation would take to ensure that the applicants complied with their obligations after the meeting.
  4. I do not consider that the culpability of the applicants in failing to provide the returns to the respondent by 5 September 2014 is disproportionately insignificant to the base penalty rate.
  5. I certainly draw an adverse inference against the applicants from the provision of a logbook that was published after the purported entries in the logbook. This conduct does not warrant any remission of penalty.
  6. I do not consider it appropriate to remit the administrative penalty imposed either in part or whole. The applicants have an onus under the former s 14ZZK(b)(iii) of the TAA53 (which applies to this application under Act no 88 of 2013) to prove that the remission decision should have been made differently. The applicants have not discharged this onus. I also do not consider that the applicants have discharged the onus of showing that the objection decisions are excessive.

(Re GSLL and FCT [2016] AATA 954, Re MKDZ and FCT & Re ZZSW and FCT, AAT, Ref Nos 2015/3760-3763, 2015/3764-3767, 2015/3769-3770, McDermott DP, 29 November 2016.)

[FJM] [LTN 233, 1/12/16]