Mitri and Commissioner of Taxation (Taxation) [2024] AATA 1268 (28 May 2024)

1. The objection decision with respect to the shortfall interest charge assessments of Frontlink Pty Ltd for the years ended 30 June 2009 and 30 June 2011 are affirmed.

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

TAXATION - INCOME TAX - decisions giving effect to tribunal's conclusions in earlier reasons

TAXATION - ADMINISTRATIVE PENALTIES - whether applicants discharged burden of proving assessments of administrative penalties are excessive - whether shortfalls due to intentional disregard of the law or recklessness - whether taxpayer exercised reasonable care - whether remission appropriate - decisions set aside - decisions partly allowing objections substituted

TAXATION - SHORTFALL INTEREST CHARGE - whether further remission appropriate - decisions affirmed

Income Tax Assessment Act 1997 (Cth), s 152-15

Taxation Administration Act 1953 (Cth), Schedule 1, ss 280-50, 280-160, 284-10, 284-90, 298-20

N&M Holdings Pty Ltd & Anor v Federal Commissioner of Taxation [2020] FCA 1186

Mitri and Commissioner of Taxation [2023] AATA 3762

Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345; (2007) 66 ATR 1

Russell v Federal Commissioner of Taxation [2009] FCA 1224

Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) FCR 483

Suburban Property Owner v Commissioner of Taxation [2012] AATA 394

1. This case concerned the income tax treatment of profits or gains on sales of various properties by Frontlink Pty Ltd (Frontlink), particularly whether the profits or gains were on revenue or capital account, and associated administrative penalty and shortfall interest charge (SIC) issues.
2. Aside from matters conceded by the Commissioner, we decided the primary tax issues against the applicants on 30 October 2023.[1] Since the reasons for our decisions regarding the primary tax issues might inform the appropriate decisions regarding penalties and SIC, and for other reasons, we invited the parties to make further submissions regarding these issues, and regarding the orders required to give effect to our decisions on the primary tax issues.
3. These reasons, which should be read with, and adopt terminology from, our earlier reasons, address the remaining penalty and SIC issues to be resolved and the final orders of the Tribunal in respect of the applications for review. [2]

1. By s 284-90 in Schedule 1 to the Taxation Administration Act 1953 (Cth) ('TAA'), Parliament has prescribed penalties in what has been described as 'gradations of increasing severity in terms of conduct by a taxpayer or his, her or its agent which has resulted in a tax shortfall'.[3]
2. Thus, failure to take reasonable care, recklessness and intentional disregard of the law attract base penalty amounts of 25%, 50% and 75% respectively of the relevant tax shortfall. The applicable base penalty amount is increased by an uplift of 20% where, relevantly, a penalty has previously been applied.
3. The authorities establish that 'intentional disregard' requires:

inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the [Act or regulations].[4]

4. The object of the administrative penalty legislation is stated to be to provide a uniform administrative penalty regime to apply to entities that fail to meet their obligations under taxation laws.[5] Implicitly, it is to encourage voluntary compliance with taxation obligations.
5. Under s 298-20 in Schedule 1 of the TAA, the base penalty amount may be wholly or partly remitted where, having regard to all relevant circumstances, it is appropriate to do so.[6]
6. Similarly, under s 280-160(1) of Schedule 1 to the TAA, SIC may be wholly or partly remitted where the Commissioner, or the Tribunal on review, considers it fair and reasonable to do so. This has been described as a very general power to remit where it is fair and reasonable to do so.[7] The object of the SIC is to:

neutralise benefits that taxpayers could otherwise receive from shortfalls of income tax . . . , so that they do not receive an advantage in the form of a free loan over those who assess correctly.[8]

7. In neither case are special circumstances or the like a pre-condition of the discretion to remit. In considering remission of SIC, regard must be had to the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments, but not just because any benefit received is less than the SIC.[9]

1. The parties agree these issues relate only to Frontlink in its own right. There are no remaining issues regarding the other applicants.
2. The penalty issues relate to the 2009, 2011 and 2013 income years, and the SIC issues relate to the 2009 and 2011 income years.

1. The amounts involved, after allowing for the Commissioner's concessions, are:

1. The shortfalls in the 2009 income year relate to the sale of the Beveridge property. The 2011 and 2013 shortfalls relate to the sale of the Cranbourne property.
2. The Commissioner assessed penalties at 75% of the shortfall in each case on the basis that the shortfalls resulted from intentional disregard of the law, plus a 20% uplift. The difference between the assessed penalty for 2009 and the reduced amount in the fifth column in the table results from the Commissioner no longer pressing the 20% uplift for that year. The 50% reduction in the 2011 and 2013 base penalties reflects the Commissioner's concession that remission to that extent is appropriate under his guidelines because Frontlink had included 50% of the gain on the sale of the Cranbourne property in its 2012 return (rolled over from 2010).[10]
3. Frontlink accepts the 20% uplift applies for 2011 and 2013 but says the shortfalls did not result from intentional disregard of the law and in any case the penalty should be remitted in full or to no more than 25%. Further, that the Commissioner's concession that a 50% remission is appropriate should be applied to a reduced base penalty amount (if any).
4. Thus, the decisions for the Tribunal in respect of penalties are whether Frontlink has proved the assessments are excessive because:

(a) the shortfalls did not result from intentional disregard of the law and, if so, the correct base penalty amounts; and/or > > (b) it is appropriate for the base penalty amounts to be further remitted.

5. The SIC amounts before the Tribunal reflect the Commissioner's remission of SIC to the base rate from 1 April 2016 which occurred before Frontlink's objection. The decision for the Tribunal is whether Frontlink has proved it is fair and reasonable to further remit the SIC amounts taking into account the principles set out above.

BASE PENALTY - 2009 (SALE OF BEVERIDGE PROPERTY)

1. The Commissioner identified two issues relating to this sale: the treatment of the sale as on capital account and bringing only the discounted 50% gain to account as arising on a sale by Frontlink as trustee of the NMFT rather than in its own right.
2. In respect of the first issue, we see the sale of this property as relevantly distinguishable from the sale of the Cranbourne property. The Cranbourne property was acquired after an earlier option agreement conditional upon re-zoning approval and was sold as part of a sophisticated joint venture with an Australand entity. The circumstances were plainly open to the characterisation of having the commercial flavour of a significant development and subdivision venture.
3. The Beveridge property was sold to a related superannuation fund. While that sale was immediately followed by a joint venture agreement with an Australand entity to which Frontlink was a party, the venture did not proceed and, in any case, it is the superannuation fund not Frontlink that would have been the vendor had the venture proceeded.
4. In those circumstances, we are not prepared to adopt the serious allegation that Frontlink - and more particularly its accountants to whom preparation of the tax return was entrusted - must have known the sale was on revenue account, but nevertheless treated the gain as a capital gain. Contrary to the Commissioner's urging, in our view, the surrounding circumstances do not support that inference. Such an allegation was not put to the accountant responsible for the return, Mr Ravalli, and implicitly is contrary to his evidence.
5. We concluded Frontlink had not proved the sale of the Beveridge property was on capital account. However, that conclusion was not so compelling that it could support an inference that the accountants must have known the sale was on revenue account, but intentionally and dishonestly treated the gain as on capital account. The revenue versus capital distinction is notoriously difficult and fact specific.
6. In this case, while we did not accept Sam's narrative regarding his intentions on purchase of the Beveridge property, it is not irrelevant that the property was held for a number of years and was sold undeveloped to the related superannuation fund. We give little weight to the absence of comprehensive legal advice regarding the treatment of the gain in circumstances where Frontlink engaged external accountants to prepare its tax return. Frontlink was entitled to assume its accountants were capable of addressing the relevant tax issues and the revenue-capital distinction which is a common issue for tax accountants.
7. We also give little weight to the income tax return's listing of the taxpayer's main business activity as 'Land development or Subdivision'. Subdivision may occur as part of a mere realisation of a capital asset. Mr Ravalli explained[11] the description would have been carried forward from previous years and that the return described the type of trust as an investment trust rather than a trading trust which he indicated would be appropriate for an entity carrying on land development.[12]
8. For similar reasons, we are not prepared to infer the accountants dishonestly treated the property as sold by Frontlink in its capacity as trustee for the NMFT knowing that it was held by Frontlink in its own right. While we concluded Frontlink had not proved the sale was made by Frontlink as trustee, there was conflicting evidence on this matter.
9. We are persuaded neither Frontlink nor the accountants deliberately and dishonestly treated the gain as assessable under the CGT provisions while knowing the gain to be revenue in nature.
10. It follows that we are persuaded the assessment of the base penalty amount at 75% for intentional disregard of the law is excessive. However, we are not persuaded it was not reckless to treat the sale as made by Frontlink as trustee.
11. The decision to treat the sale as made by Frontlink as trustee was apparently reached in the face of the warnings in advice obtained from a tax barrister regarding the need for clear contemporaneous evidence, which was clearly not available. Indeed, there were contrary indicators as set out in our earlier reasons. Frontlink proceeded to treat the gain as derived by the trust without obtaining further advice or assurance even though the barrister specifically raised the importance of clear evidence which, as our earlier reasons indicate, was plainly not available.
12. In the absence of a contemporaneous record of the basis on which the clearly contentious decision to return the gain in the return for Frontlink as trustee was reached, we are not persuaded it was not reckless to do so.
13. Accordingly, we are persuaded the base penalty amount should be reduced from 75% to 50% but not further. Because some of the issues relating to remission arise in respect of all of the remaining penalty assessments, we set out our reasons regarding whether further remission of any of the remaining disputed penalties is appropriate below. For the same reason, we consider SIC remission for 2009 and 2011 together below.

BASE PENALTY - 2011 & 2013 (SALE OF CRANBOURNE PROPERTY)

1. The Commissioner submitted the objective evidence supports an inference that Frontlink and/or its agents knew the gains on sale of the Cranbourne property were on revenue account but chose to return them as capital gains in order to reduce the amount of tax payable by claiming the small business CGT concessions.
2. Frontlink engaged accountants for the preparation of its returns as it was entitled to do. There is no suggestion this is a case where accountants simply acted on instructions from the client to submit returns in a particular way. To the contrary, there is specific evidence that the accountants reached their own independent professional conclusion regarding the appropriate treatment of the gain.
3. In those circumstances, and in the absence of other relevant concrete evidence, we consider there is insufficient evidential foundation from which an inference that Frontlink knew the gains were on revenue account, but deliberately claimed the CGT concessions, could be drawn. Thus, we are not prepared to make a positive finding that the shortfalls resulted from Frontlink intentionally disregarding the law.
4. Nor do we consider an inference that the accountants were deliberately dishonest is reasonably open on the evidence. Mr Ravalli gave evidence that he considered that returning the gain as a capital gain was professionally open to him.[13] It was not put to Mr Ravalli that he had dishonestly prepared the return in the way that he did while knowing the sale was on revenue account or that the CGT small business provisions did not apply. There is a controversy regarding whether the CGT small business concessions would have applied, which turns upon whether Natalie as an employee was carrying on a business as defined. The answer to that question is not so clear cut that it would be concluded the accountants were deliberately dishonest in preparing the returns on the footing that the concessions applied.
5. However, that is not the end of the matter. For Frontlink to succeed in displacing the assessment of the base penalty amount at 75%, it is not sufficient that we do not make a positive finding that Frontlink or its accountants intentionally disregarded the law. Frontlink must positively prove that it did not directly or through its accountants intentionally disregard the law.
6. As we pointed out in our earlier reasons, Frontlink's director, Natalie, did not give evidence and Frontlink's counsel specifically declined to submit or acknowledge that her father, Sam, was its controlling mind. Nevertheless, it was clear that Sam had substantial involvement in the affairs of Frontlink and his evidence suffered from the credibility issues discussed in our earlier reasons. Further, it is not clear to what extent Sam instructed the accountants regarding the range of factual circumstances leading to our conclusion that Frontlink had not proved the sale was on capital account.
7. We have no doubt that, with his many years of successful experience as a developer, Sam is a capable businessman. On the other hand, we observed Sam being cross-examined over several days. With the benefit of that observation and having regard to his limited formal education, we consider it is unlikely that Sam would have reached his own view that the sales were on revenue account but deliberately instructed his accountant to treat the gains as on capital account. It is, in our view, far more likely, and we accept, that he entrusted these matters to his accountants. We expect he was happy with the view that the gains would be concessionally taxed, but we accept that he did not impose his will on the accountants.
8. Sam instructing his accountants to prepare the returns and relying on the way the accountants did so is inconsistent with Frontlink intentionally disregarding the law. We are, on balance, persuaded Frontlink has proved it did not intentionally disregard the law. For the reasons indicated in respect of the Beveridge property, we give little weight to Frontlink not obtaining comprehensive legal advice or the reference to its main activity in its returns.
9. We have considered whether the obtaining of advice from a barrister regarding the applicability of the CGT small business concessions would found an inference, as Frontlink submitted, that it was not reckless and exercised reasonable care. There are a number of reasons why we have concluded it does not.
10. First and foremost, the advice only addresses one aspect of those provisions - whether assets owned by other entities controlled by Sam or Natalie must be counted for the purposes of the maximum net asset value test in s 152-15 of the ITAA 1997. Secondly, the advice appears to be premised on, but does not address, an assumption that the sale of the Cranbourne property was on capital account. Thirdly, for reasons Mr Ravalli was unable to explain, the advice is wrongly premised on the sale of the property occurring in 2007, whereas it is common ground it occurred in 2010.
11. The gain on the sale of the Cranbourne property was substantial by any measure but particularly so in the context of the Mondous family's business activities. It was clear that whether the gain was of a revenue or capital nature and whether the CGT small business concessions apply would have a substantial tax effect. Further, with the background leading to the purchase of the property, including the previous option agreement subject to re-zoning approval and the sophisticated commercial nature of the sale, it must have been clear that, at the least, the treatment of the gains as attracting the small business CGT concessions would be contestable.
12. Against that background, without the benefit of contemporaneous evidence regarding the reasoning that led to the decision to treat the sale as on revenue account, we are unable to be satisfied the actions of Frontlink or its accountants were not reckless. Mr Ravalli's mere assertion, on re-examination, that he considered the characterisation as a capital gain was professionally open to him to adopt is not, in our view, sufficient to establish in the context of this very substantial gain following a sophisticated commercial transaction that that characterisation was not reckless.
13. In summary, we are persuaded the shortfalls were not due to intentional disregard of the law but not that they were not due to recklessness. It follows that Frontlink has proved the base amounts calculated at 75% are excessive and should be reduced to 50% for recklessness but not further. Frontlink accepts the 20% uplift applies but, of course, it must be applied to the reduced base penalty amounts.
14. Taking into account these conclusions, the base penalty amounts applicable in relation to the respective shortfalls become:

1. A very important issue, according to Frontlink, is the significance of 'credits' for tax payable disclosed in other years. The issue may be illustrated by reference to the amounts returned for the 2010 and 2012 income years and the amended assessments for the 2011 and 2013 income years.
2. On the basis that the gain on the sale of the Cranbourne property was on capital account and the small business concessions applied, Frontlink brought to account 50% of the gain in its return for the 2010 year which it rolled over to the 2012 year. Because the relevant time for a CGT event on sale of property is the entry into the contract of sale, and Frontlink's contract for the sale of the property was entered into in the 2010 income year, returning the gain in that year would have been appropriate if the CGT provisions applied. That choice resulted in taxable income of $22,175,253 being returned in 2012 with tax of $6,652,575.90 payable.
3. However, because the Commissioner assessed on the basis that the sale was on revenue account, he assessed the profits on the sale of the Cranbourne property in 2011 and 2013 when the sales were settled. Correspondingly, the taxable income and tax payable for the 2012 income year were amended to nil amounts. This resulted in what Frontlink terms a 'credit' of $6,652,575.90 for the 2012 year.
4. The total of Frontlink's shortfalls for 2009, 2011 and 2013, as set out in the table above, is $12,627,234.30. The total of the remaining penalties the Commissioner submits are appropriate would be $5,798,973.81.[14] However, Frontlink says if the credits due for the 2010 and 2012 year are deducted from the total shortfall, the 'net shortfall' is $5,878,191.90 and 'the penalty, if uncorrected, is over 98% of the net shortfall' (underlining added). Frontlink goes on to submit that if the base penalty were reduced to 25% of the shortfall of $12,627,23.30, this would still represent 64% of the 'net shortfall'.
5. The difficulty with this submission is that the penalty is not, on the Commissioner's approach, 'uncorrected'. That is because, as indicated earlier, the Commissioner has submitted, and we agree, a 50% remission is appropriate to reflect that Frontlink brought to account 50% of the gain ($22,175,253, with tax of $6,652,575.90 payable) in its 2012 return. That has the same effect as calculating the remission as the base penalty less the amount calculated by applying the base penalty rate to the shortfall net of the 'credit'.
6. Frontlink also sought support for further remission on the basis of the Commissioner's guideline, PSLA 2012/5, which says if an amount omitted by one entity is mistakenly included in an incorrect return period or by another entity, and there is no attempt to avoid or defer tax, remission is appropriate. However, it is implicit in that policy that the correct amount has been returned but in the wrong period or by the wrong entity. In the case of the Cranbourne property, only 50% of the gain was brought to account by Frontlink. To that extent, the appropriate remission is achieved by the Commissioner's concession that there should be a remission of 50%.

1. We consider a penalty approaching $200,000 is unduly harsh in the circumstances in which the shortfall for the Beveridge property arose.
2. As indicated earlier, the object of the penalty regime is to encourage compliance with taxation laws. This is not a case in which there was a lack of transparency which is implicit in the object of encouraging compliance. The sale was not hidden from the Commissioner. The gain was disclosed, albeit in the return for the NMFT and with the 50% discount, rather than for Frontlink in its own right which would not have been entitled to the discount.
3. Nor is it a case where the taxpayer would benefit from the gain being returned in another entity because that entity has losses that would offset the gain. As the applicants pointed out in their reply submissions on penalties, there were 14 properties (aside from the Cranbourne property) that were either held by Frontlink which would have been entitled to all of the deductions including for any losses carried forward or held by the NMFT which in turn, would have been entitled to all deductions and losses carried forward.
4. Having regard to the circumstances set out above including the returning of 50% of the gain in the NMFT's return, we consider the base penalty amount should be remitted by 50% to a penalty of 25% of the shortfall.

2011 and 2013 (Cranbourne property) - penalty remission

1. Having regard to the evident purpose of the imposition of the 20% uplift being to provide an additional deterrent in respect of a taxpayer who has previously become liable for a penalty, we consider it is appropriate to remit the penalty for 2013 to the extent of the uplift. In Suburban Property Owner v Commissioner of Taxation [2012] AATA 394, Deputy President Frost stated:

92. The evident purpose of the uplift is to provide an additional deterrent in respect of a taxpayer who has previously become liable to a penalty of this kind. However, in circumstances such as these, where one broad factual matrix applies to a number of tax years, and where amended assessments for those multiple years were made at or around the same time, a finding against the taxpayer in relation to the first income year should not count against the taxpayer in relation to subsequent income years when the taxpayer has had no opportunity to modify its behaviour in response to the finding.

2. This case has the same feature as the amending assessments were made together and the shortfall in 2013 arises out of the same issue as the 2011 shortfall. Indeed, once it is accepted that the shortfall did not result from intentional disregard of the law, this seems to be a case where, under the Commissioner's own guidelines in PSLA 2012/5, such remission would be allowed.
3. However, having regard to the 50% remission the Commissioner conceded is appropriate, and the further remission to the extent of the 20% uplift, we are not persuaded any further remission is appropriate. Without significant contemporaneous evidence of the basis on which the decision to treat the extraordinary gain as on capital account was reached (aside from copies of the barrister's opinions which were, as mentioned above, of limited scope) - notwithstanding the various circumstances we identified in our earlier reasons as pointing to the opposite conclusion - we cannot be satisfied any further remission would be consistent with the policy of encouraging voluntary compliance underpinning the administrative penalty regime.

1. The outcome of these decisions may be summarised as follows:

1. Frontlink argues that SIC should be remitted to ensure it is only paid on amounts not returned in any of the applicants' tax returns.
2. In particular, Frontlink says the remission should have the result that SIC assessed by the Commissioner from 1 December 2011 relating to tax payable for the 2011 income year is reduced by applying the SIC rate to the shortfall of $5,324,652 less the credit (of tax payable) of $96,466.50 allowed in respect of the 2010 income year.
3. In our view, it is important to keep in mind that SIC is not calculated only by reference to tax shortfalls. It is calculated by reference to the time the relevant tax was due to be paid until the day before the Commissioner's amended assessment issued.[18] Once the amended assessment issues, the notice of assessment sets the time for payment of the assessment.
4. Our attention was not drawn to evidence indicating whether or to what extent, if any, tax had been paid by the Frontlink group in other periods or entities, but later assessed to Frontlink. However, the Commissioner's submissions on penalties stated that to the extent Frontlink paid its income tax liability in respect of the 2010 and/or 2012 income years, the Commissioner paid Frontlink interest on overpayments.
5. In support of this statement, the Commissioner appended a copy of an Account Statement for Frontlink for the period 24 October 2017 to 25 October 2017. The statement shows interest of $7,858.44 and $3,290.78 for the 2010 and 2012 income years credited on 24 and 25 October 2017 respectively, although the Commissioner advised the quantum of these adjustments has since been adjusted to correct calculation errors. The statement also shows a closing debit balance of $33,800,231.36, indicating Frontlink had not paid all tax-related liabilities due to be paid at that time.
6. Frontlink's reply submissions on penalties and SIC did not contest or address this explanation contained in the Commissioner's submissions. In the circumstances, on the material before us, we are not persuaded it is fair and reasonable to allow any further remission of SIC.

1. The orders of the Tribunal set out at the commencement of these reasons constitute all of the decisions of the Tribunal in relation to the various objection decisions under review.
2. In our earlier reasons, we sought the parties' views regarding the orders required to give effect to our conclusions regarding the primary tax assessments. The orders set out above reflect their agreed positions.
3. In relation to penalties, the orders are intended to reflect the Commissioner's position at the close of the case that penalties are only sought in respect of Frontlink for the 2009, 2011 and 2013 income years and not in respect of Frontlink as trustee of the NMFT or in respect of Renee Mitri, Michelle Mondous or Natalie Mondous.
4. Frontlink conceded the Tribunal has no jurisdiction to consider SIC in respect of the 2013 year. Accordingly, we make no order regarding Frontlink's objection for 2013 to the extent that it purported to object against SIC. The applicants did not seek separate orders relating to SIC where the relevant primary tax assessments are to be set aside.

I certify that the preceding 69 (sixty-nine) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe and Senior Member Robert J Olding

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

[1] Mitri and Commissioner of Taxation [2023] AATA 3762.

[2] The applicants' submissions noted that in its earlier reasons, the Tribunal referenced the capital gains tax (CGT) small business concessions, which include the 50% reduction under subdivision 152-C of the Income Tax Assessment Act 1997 (Cth), in the context of a controversy regarding whether properties were held by Frontlink in its capacity as trustee for the Natalie Mondous Family Trust or in its own right. To the extent that properties were held by Frontlink as such trustee, the 50% discount capital gain under subdivision 115-A may have been available if the sales were on capital account, but not if the properties were held by Frontlink in its own right (s 115-10). The applicability or otherwise of the 50% reduction, and the motivations of the applicants and their advisers in that regard, were not considerations taken into account in reaching the conclusions in our earlier reasons; the penalty and SIC issues; or the orders accompanying these reasons. Because we concluded the relevant sales were on revenue account, it was not necessary to consider CGT issues.

[3] Russell v Federal Commissioner of Taxation [2009] FCA 1224, [182].

[4] Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345; (2007) 66 ATR 1, [43], adopted in Russell v Federal Commissioner of Taxation [2009] FCA 1224, [182].

[6] Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) FCR 483.

[7] N&M Martin Holdings Pty Ltd & Anor v Federal Commissioner of Taxation [2020] FCA 1186, [98].

[12] Hearing book, page 758. We understand 'I' against the prompt 'Type of trust' to signify Investment.

[14] This number does not take into account the reductions in the base penalty amounts we have determined are appropriate.