DQTB and Commissioner of Taxation (Taxation) [2023] AATA 515 (28 March 2023)

(a) So-called work-related expenses which appear to include expenses for dinners and wine for employees and contractors of DQTB's former employer; > > (b) Expenses relating to the agistment activities; and > > (c) Legal expenses relating to DQTB's claim against her former employer.

3. The base penalty should be proportionately adjusted to take account of the extent to which I have decided DQTB is entitled to a further deduction for legal expenses.
4. DQTB gave evidence that she prepared her return personally without any legal or taxation assistance and that she has limited skills and knowledge in relation to taxation. DQTB also pointed out that she had been under the care of a psychiatrist since July 2015 for various conditions and her mental health was aggravated by the stress of the litigation with her former employer. I accept this unchallenged evidence.
5. The evidence outlined provides some context for the circumstances in which DQTB prepared her return and is part of the factual matrix against which the question of remission may be considered. It does not, however, provide a basis on which I could be satisfied that DQTB exercised reasonable care or was not reckless in the preparation of her return. It provides no insight into the thought processes leading to the claiming of what were, in the context of the return as a whole, substantial deductions and which, if accepted as returned, would have had a material effect upon her overall taxation liability. Indeed, the evidence does not reveal to what extent, if any, DQTB turned her mind at all to the basis on which these substantial expenses could be said to be deductible.
6. I note that DQTB abandoned her claim for the so-called work-related expenses which included items that were plainly not deductible. To that extent, at least, there might be an inference available to support a positive finding that DQTB was reckless in her approach to claiming deductions.
7. However, it is not necessary for me to make any such positive finding. In the circumstances outlined above, there is no evidentiary basis on which it could be concluded that DQTB has discharged the burden of proving the assessment of the base penalty at 50% for recklessness is excessive. I therefore turn to consider whether the base penalty should be remitted in whole or in part.
8. In that regard, case authority establishes the discretion to remit is broad. Essentially, the question the Tribunal must answer is whether it is appropriate in all the circumstances to wholly or partly remit the penalty.
9. Without the benefit of recent judicial guidance, I might have taken the view that whether or to what extent DQTB had engaged with the requirements for deductibility of the various categories of expenditure claimed would be a factor the Tribunal must take into account to make a legally valid decision regarding whether it is appropriate to remit the base penalty. Without relevant evidence in this regard, it is difficult to determine the degree of recklessness involved which might be thought to be relevant to whether it is appropriate to remit penalty.
10. However, in Commissioner of Taxation v Complete Success Solutions Pty Ltd ATF Complete Success Solutions Trust,[12] the Full Federal Court unanimously stated:

The Tribunal stated that it had no evidentiary basis "to consider whether remission to any extent would be appropriate in the circumstances": at T [180]. It emphasised that "there is no evidence that [CSS] through [its director] or its tax agents engaged at all with the statutory requirements for GST-free supplies of bullion". The power in s 298‑20 of Sch 1 to the Taxation Administration Act 1953 (Cth) to remit a penalty is constrained only by the purposes and object for which the power is conferred: Sanctuary Lakes Pty Ltd v Federal Commissioner of Taxation [2013] FCAFC 50; (2013) 212 FCR 483 at 521 [193] (Greenwood J). In determining whether to remit a penalty, the Tribunal is not confined only to considering the circumstances surrounding the failure on the part of the taxpayer or its agent to exercise reasonable care or to not act recklessly in making the statement to the Commissioner that might explain the conduct the subject of the penalty. It is also relevant to consider what circumstances, on the evidence, ought to be taken into account in determining, as a matter of discretion, that, notwithstanding the imposition of a penalty on the taxpayer on the basis of a failure to take reasonable care or acting recklessly in making the statement, the penalty ought nevertheless be reduced either in whole or in part: Sanctuary Lakes at 524 [209] (Greenwood J).[13]

11. Those remarks suggest that, notwithstanding the absence of evidence concerning the basis on which DQTB decided to claim the deductions, I should nevertheless consider what other circumstances, on the evidence, ought to be taken into account to determine whether the penalty should be wholly or partly remitted. I proceed accordingly.
12. Although not supported by expert medical evidence, DQTB gave unchallenged evidence that she was suffering from serious mental health issues and the impact of the proceedings against her former employer. I accept that evidence and have taken it into account in determining whether any remission of penalty is appropriate. I have also taken into account her otherwise apparently good tax compliance record and co-operation in the course of the audit to which DQTB referred, without challenge, in her witness statement.
13. So far as the shortfall relates to the legal expenses, I consider a penalty of 50% to be harsh. This is a rather technical area and taking into account DQTB's personal circumstances, a mistaken view that the expenses were deductible as related to her employment is somewhat understandable. On the other hand, there is no evidence that DQTB undertook any inquiries to determine the proper tax treatment of these expenses. Weighing up all these circumstances, I consider that a penalty in the order of 10% of the shortfall so far as it relates to the legal expenses issue is appropriate.
14. The position in relation to the agistment expenses is more difficult. On the one hand, DQTB had obtained advice that, to a layperson, might have left her with the impression that, if the applicants were to establish a business on the property, expenses related to that business would deductible. However, taxpayers must live with the consequences of structures they create. It is the agistment activities, not the pastoral activities conducted by the company, that determines the deductions allowable to the applicants. The question of whether as a matter of fact a business is carried on is itself notoriously contested in the context of small-scale operations. However, very substantial deductions were claimed without, so far as the evidence reveals, inquiries being made or other steps taken by DQTB to satisfy herself as to the validity of these claims.
15. Doing my best to weigh these factors and taking into account DQTB's personal circumstances, I consider a penalty in the order of 30% is appropriate so far as the shortfall relates to the agistment activities.
16. In relation to the other work-related expenses, I am not persuaded any remission is appropriate. As noted, these expenses included alcohol and other outlays that were plainly not deductible as inquiries would have readily established. There is no evidence that any such inquiries were made. Even having full regard to DQTB's personal circumstances, it would be contrary to the object of the penalty regime to remit penalties for reckless deduction claims in that context.
17. Taking into account these considerations and the proportions of the shortfall relating to each of the categories of deductions, I consider it appropriate to remit the base penalty remaining, after adjustment for the further legal expenses allowed, by $5,000.

1. Rather than risk error in re-calculating the primary tax assessment for DQTB and consequent adjustment to the base penalty, I consider it is appropriate to remit the objection decision in respect of DQTB to the Commissioner for reconsideration in accordance with these reasons. The objection decision for KHMQ must be affirmed.

I certify that the preceding 135 (ONE HUNDRED AND THIRTY-FIVE) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Olding

.........................[SGD]..........................................

[1] Taxation Administration Act 1953 (Cth), s 14ZZK.

[2] For this and the preceding propositions, see, for example: Imperial Bottleshops Pty Ltd v Commissioner of Taxation [1991] FCA 276; (1991) 22 ATR 148, 155; and Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212.

[3] Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212, [88]; Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation (1983) 44 ALR 607, 612.

[4] Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971, [54].

[5] Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation [2022] FCA 972, [47].

[6] This summary is based on witness statements filed on behalf of the applicants.

[7] Income Tax Assessment Act 1997 (Cth), s 8-1(1)(b).

[8] [1995] AATA 582.

[9] [1995] AATA 582, [29].

[10] Martin v Commissioner of Taxation [1953] HCA 100; (1952) 90 CLR 470.

[11] [1991] HCA 42; (1991) 173 CLR 1

[12] [2023] FCAFC 19.

[13] [2023] FCAFC 19, [54(2)].