ISSUE 2: WAS THE PENALTY CORRECTLY IMPOSED BY THE COMMISSIONER AT THE RATE OF 25% UNDER SUBSECTION 284-75 TAA 1953
102 The Commissioner imposed an administrative penalty of 25% on the applicant pursuant to s 284-75 of the TAA 1953.
103 There is no dispute that the Commissioner is empowered to impose an administrative penalty at this rate in appropriate circumstances. The question is whether the Commissioner has correctly done so in light of the events which have transpired.
104 In his reasons for decision disallowing the applicant's objection, the Commissioner said in summary that:
· For the income year ending 30 June 2003, the trustee of the Super Fund failed to declare the relevant trust distributions as special income in its income tax return.
· The return treated s 273(7) as if it did not apply to the income derived by the trust resulting in a shortfall amount within the meaning of s 284-80(1) of the TAA 1953 of $676,906.95.
· The approach taken in the return, with this result, was wrong. A false or misleading statement had been made. It followed that a shortfall amount existed because a false or misleading statement had been made in the income tax return as to the derivation of special income during the financial year ending 30 June 2003.
· The applicant did not take reasonable care in making the statement. Accordingly the exception in s 284-215 TAA 1953 was inapplicable.
· Further, the applicant had made a statement resulting in a tax shortfall in which it had treated an income tax law as applying to the distribution from the Fixed Trust to the Super Fund in a particular way that was not reasonably arguable.
105 So far as relevant, s 284-75 of the TAA 1953 provides:
(1) You are liable to an administrative penalty if:
(a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law; and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
(c) you have a shortfall amount as a result of that statement.
(2) You are liable to an administrative penalty if:
(a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers of performing functions under an income tax law; and
(b) in the statement, you or your agent treated an income tax law as applying to a matter or identical matters in a particular way that was not reasonably arguable; and
(c) you have a shortfall amount as a result of the statement; and
(d) item 4, 5 or 6 of the table in subsection 284-90(1) applies to you.
106 The term "shortfall amounts" is defined in s 284-80.
107 As it then read, s 284-215(2) of the TAA 1953 stated (in summary) that in determining whether a taxpayer was liable to an administrative penalty for a shortfall amount as a result of a statement in the tax return that was false or misleading in a material particular, the taxpayer was deemed not to have a shortfall if the taxpayer had taken reasonable care in making the statement.
108 In his appeal statement the Commissioner relied on both s 284-75(1) and (2) as grounds for imposing the penalty. However in written and oral submissions before the Court, the Commissioner did not press s 284-75(1), and relied only on the contention that the applicant, inter alia, had not had a reasonably arguable case. Accordingly in my view the question whether the applicant had taken reasonable care in making statements which were false or misleading is not relevant in these proceedings.
109 In respect of whether the statement of the applicant was "reasonably arguable", the applicant submits that it had received written legal advice from a solicitor as to the taxation implications associated with the receipt by the Super Fund of any distribution from the Fixed Trust, which advice was supported by the written opinion of senior counsel. On this basis, the applicant submits that the position represented by the statement in the tax return was reasonably arguable.
110 So far as relevant in these proceedings, "reasonably arguable" is defined in s 284-15(1) of the TAA 1953 as follows:
A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is as likely to be correct as incorrect, or is more likely to be correct than incorrect.
111 In Walstern v Commissioner of Taxation [2003] 138 FCR 1 at [108], Hill J discussed the meaning of "reasonably arguable" within the context of s 226K of the ITAA 1936. Section 226K incorporated concepts similar to those in s 284-75 of the TAA 1953, and relevantly provided that a taxpayer was liable to pay a penalty in respect of a shortfall if, when a statement was made, it was not reasonably arguable that the way in which the application of the law was treated was correct. His Honour said that the following conclusions could be drawn as to the correct approach to penalty:
1. The test to be applied is objective, not subjective. This is clear from the use of the words "it would be concluded"…;
2. The decision-maker considering the penalty must first determine what the argument is which supports the taxpayer's claim;
3. That person will already have formed the view that the claim is wrong, otherwise the issue of penalty could not have arisen. Hence the decision-maker at this point will need to compare the taxpayer's argument with the argument which is considered to be the correct argument;
4. The decision-maker must then determine whether the taxpayer's argument, although considered wrong, is about as likely as not correct, when regard is had to "the authorities";
5. It is not necessary that the decision-maker form the view that the taxpayer's argument in an objective sense is more likely to be right than wrong. That this is so follows from the fact that tax has already been short paid, that is to say the premise against which the question is raised for decision is that the taxpayer's argument has already been found to be wrong. Nor can it be necessary that the decision-maker form the view that it is just as likely that the taxpayer's argument is correct as the argument which the decision-maker considers to be the correct argument for the decision-maker has already formed the view that the taxpayer's argument is wrong. The standard is not as high as that. The word "about" indicates the need for balancing the two arguments, with the consequence that there must be room for it to be argued which of the two positions is correct so that on balance the taxpayer's argument can objectively be said to be one that while wrong could be argued on rational grounds to be right;
6. An argument could not be as likely as not correct if there is a failure on the part of the taxpayer to take reasonable care. Hence the argument must clearly be one where, in making it, the taxpayer has exercised reasonable care. However, mere reasonable care will not be enough for the argument of the taxpayer must be such as, objectively, to be "about as likely as not correct" when regard is to be had to the material constituting "the authorities"; and
7. Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of "authority" a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen to be wrong it is nevertheless "about" as likely to be correct as the correct view. A question of judgment is involved.
112 I note that the applicant relied on reputable legal advice (and also, as is clear from the evidence, reputable accounting advice) in preparing the relevant income tax return. Notwithstanding this reliance, I am unable to find that the position maintained by the relevant statement was "reasonably arguable" for the purposes of s 284-75(2) of the TAA 1953. I take this view because:
· As Hill J observed in Walstern, the test of whether a statement is "reasonably arguable" is objective, not subjective. If objectively the statement is not reasonably arguable, the belief of the taxpayer in advice provided by professional advisers does not make its position reasonably arguable.
· Although there are no authorities considering s 273, there are many authorities considering concepts of "income", "derived", "dealing", "arrangement", "parties", and "arm's length". Those authorities support the position taken by the Commissioner in these proceedings rather than the applicant, as does the Explanatory Memorandum.
113 It follows that there is no basis for a finding that what the applicant argued is as likely to be correct as incorrect, or is more likely to be correct than incorrect.