The AAT has reduced a tax shortfall penalty from 50% to 25% after finding that a taxpayer and its tax agent were not “reckless” in claiming $3.1m in deductions for a boat owned by a related trust.
The taxpayer is the corporate trustee of a trust (controlled by Mr X) that is the ultimate beneficiary of another trust (M Trust). In 1998, M Trust purchased a motor yacht for $2.3m and entered into a sub-agency agreement. A broker was left to undertake the marketing and operational activities. Before purchasing the yacht, Mr X obtained tax advice from a large accounting firm that the boat would generate substantial deductions. For the 1999-2003 tax years, M Trust claimed deductions totalling $3.1m, which were later disallowed by the Commissioner and subject to a 25% penalty on the shortfall amount. Subsequently, the Commissioner increased the penalty to 50% due to alleged “recklessness” by the taxpayer or its tax agent.
The AAT reduced the tax shortfall penalty from 50% to 25% after ruling that neither the taxpayer (nor its tax agent) acted “recklessly” for the purposes of s 284-90(1) of Sch 1 to the TAA. However, the AAT upheld the 25% penalty on the shortfall amount after concluding that the deductions for the yacht were not “reasonably arguable” within s 284-15 of Sch 1. The AAT said it was clear that the taxpayer had the intention of generating a profit and it was reasonable for Mr X to rely on the tax advice he received. Although the accounting firm’s conclusion on the boat deductions was “erroneous”, the AAT held that it was not “grossly careless” as it was reached having regard to the relevant information, and involved a reasonable professional judgment.
(AAT Case [2012] AATA 348, Re JCZC and FCT, AAT, Ref Nos 2009/1304-05 & 2011/0374, Dunne SM, 12 June 2012.)
[LTN 113, 14/6]