The Federal Court has upheld a 75% tax shortfall penalty imposed on the trustee of a family trust operating independent supermarkets after ruling that it was open for the AAT to find that the taxpayer had “intentionally disregarded” its tax obligations under s 226J of the ITAA 1936.
The Court dismissed the taxpayer’s appeal from AAT Case [2012] AATA 178 (see 2012 LTN 58 [5]) and upheld the decision to disallow deductions in relation to superannuation contributions for family members of the trust because they were not “employees” for the purposes of former s 82AAC of the ITAA 1936.
The Court rejected the taxpayer’s argument that the word “employee” could include a person who had a job or is working, without necessarily having to be a party to a contract of service.
The Court also ruled that “book entries” in the accounts of the taxpayer were not sufficient on their own to establish that contributions had been “made” for the purposes of former s 82AAC in respect of the director of the taxpayer (who was a deemed “employee”).
In upholding the 75% tax shortfall penalty, the Court rejected the taxpayer’s claim that it had been denied procedural fairness due to the Commissioner’s alleged failure to directly cross-examine the director of the taxpayer with respect to the “intentional disregard” of its tax obligations. The taxpayer had sought to rely on the rule in Browne v Dunn (1893) 6 R 67 to claim that the AAT was bound to accept the uncontested evidence in the director’s witness statement. The Court noted that the application of the rule in Browne v Dunn must be viewed in the statutory context whereby the onus of proving that an assessment was excessive is borne by the taxpayer. Furthermore, the Court said the requirements of the rule in Browne v Dunn may be satisfied prior to a hearing if a party provides notice of the case and documents, which it proposes to draw inferences from. In distinguishing the finding in Howard v FCT (No 2) [2011] FCA 1421, the Court considered it was not necessary for the Commissioner to directly put to the director that the contents of his witness statement were untrue “once the factual edifice which underpinned them had been either demolished or successfully undermined”.
(VN Railway Pty Ltd & Anor v FCT [2013] FCA 265, Federal Court, Tracey J, 27 March 2013.)
[LTN 60, 28/3/13]