Division 298
190 Division 298 provides for "Machinery provisions for civil penalties".
191 The Division applies if an administrative penalty is imposed on an entity by a Division of Part 4-25 or by Subdivision 162-C of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the "GST Act"). Leaving aside for the moment the application of the Division to a penalty imposed by the GST Act, the liability to administrative penalty arises under the Divisions of the Administration Act and the method of determining the amount of the penalty is also determined by the Divisions of Part 4-25 of the Administration Act. In determining whether a taxpayer is liable to a penalty or in identifying the amount of a penalty, no discretion or election is exercised by the Commissioner. The taxpayer's liability to penalty and the amount of the penalty have been determined by the Parliament by operation of the Administration Act itself. Under s 298-30(1), the Commissioner, however, must make an assessment of the amount of the administrative penalty under Division 284 of the Administration Act. Under s 298-10, the Commissioner must give written notice to the entity of the entity's liability to pay a penalty imposed under a Division of Part 4-25 of the Administration Act. The penalty becomes due for payment on the day specified in the notice.
192 Section 298-20 addresses the topic of "Remission of Penalty". It applies to each penalty arising under each of the penalty regimes under Part 4-25. In order to provide the Commissioner with the flexibility necessary to determine the circumstances informing the exercise of the discretion to remit a penalty imposed under a Division of Part 4-25, s 298-20(1) simply provides that the Commissioner "may remit all or a part of the penalty". Section 298-20 does not provide for any considerations that must be taken into account in the exercise of the discretion to remit all or a part of the penalty. For the sake of completeness, s 298-20 is set out below:
SECTION 298-20 REMISSION OF PENALTY
298-20(1) The Commissioner may remit all or a part of the penalty.
298-20(2) If the Commissioner decides:
(a) not to remit the penalty; or
(b) to remit only part of the penalty;
the Commissioner must give written notice of the decision to the entity.
298-20(3) If:
(a) the Commissioner refuses to any extent to remit an amount of penalty; and
(b) the amount of penalty payable after the refusal is more than 2 penalty units; and
Note: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit.
(c) the entity is dissatisfied with the decision;
the entity may object against the decision in the manner set out in Part IVC.
193 The discretion conferred by s 298-20(1) is unconstrained, according to its terms. It must, however, be exercised for a proper purpose; in accordance with the objects of the Administration Act; and according to law. Before returning to aspects of s 298-20, one further aspect of the Administration Act should be noted.
194 The Part of the Administration Act immediately following Part 4-25 is Part 4-50. Part 4-50 confers a power on the Commissioner to release particular classes of taxpayers from particular taxation liabilities. There are five classes of liabilities to which the release power relates and in respect of some of those classes of liabilities, the Commissioner has a power to release a taxpayer from a penalty under s 163A of the Income Tax Assessment Act 1936 (Cth). The particular taxpayers in respect of which the release power is conferred are either individuals or the trustee of the estate of a deceased person. The Parliament has not conferred a power on the Commissioner either within Part 4-25 or Part 4-50 to release a taxpayer from a liability to penalty arising under any of the Divisions of Part 4-25.
195 It can be seen from the scheme adopted by the Administration Act for the determination of an administrative penalty, that a number of concepts are embodied in the statutory arrangements. Part 4-25 provides for the integers which give rise to a liability in a taxpayer to an administrative penalty and the method of calculation of the amount of that penalty. Part 4-25 contemplates exceptions either from a liability in some cases or the reduction of the amount of a liability in another case. Part 4-25 provides for the remission of a penalty and Part 4-50 contemplates circumstances in which the Commissioner is conferred with a power to release particular taxpayers from particular classes of liabilities.
196 Section 298-20(1) confers a power on the Commissioner to remit which is engaged (or applies) "if an administrative penalty is imposed on an entity by another Division in this Part (s 298-5(a)), leaving aside for present purposes a penalty imposed by Subdivision 162-C of the GST Act) and once engaged, the Commissioner "may remit all or a part of the penalty" [emphasis added]. The starting point in the exercise of the power conferred by s 298-20(1) to remit the penalty is to identify the particular Division (or Subdivision) of Part 4-25 (in these appeals Subdivision 284-B) and the relevant integers by which the penalty "is imposed on an entity". At [185], the Tribunal said this as to the Issue 5 claim to a deduction (among other claims):
… I have also decided that Lakes' statements to the Commissioner … when claiming deductions were wrong and so false within the meaning of s 284-75(1) of the [Administration Act].
197 At [189], the Tribunal said this in relation to Issue 5 (among other claims):
On the view that I have taken, Lakes' claim for deductions in relation to Issues 1, 2, 3 and 5 were wrongly made. Therefore, its claim for deductions were made on an incorrect understanding of the law and so on the basis of false statements. Each of those statements had a significant impact upon the assessment of its taxable income and so the tax that would otherwise be payable upon it. They were false in a material particular. Therefore, I have concluded that Lakes is liable to an administrative penalty under s 284-75(1) of the [Administration Act].
198 Having reviewed the elements of s 284-15 of Schedule 1 concerning the definition of "reasonably arguable" and the authorities and principles governing the question of when a matter is reasonably arguable, the Tribunal made this finding at [196] concerning the position taken by Sanctuary Lakes in relation to Issue 5:
… I find that there was room for a rational argument that, viewed objectively, Lakes was entitled to a deduction in relation to [Issue 5]. Therefore, Lakes is not liable to an administrative penalty under s 284-75(2). That makes no difference for it is already liable to such a penalty under s 284-75(1).
199 As to reasonable care, the Tribunal said this at [207] in relation to Issue 5:
On the material that I have and in the absence of any evidence regarding any particular steps that Lakes took to ensure that it did not make a statement false [sic] in a material particular, I am satisfied that its shortfall amounts resulted from a failure by it or its agent to take reasonable care to comply with a taxation law.
[original emphasis]
200 Even though the Commissioner had determined that the taxpayer was liable to a 25% penalty under the Administration Act either because the shortfall amount resulted from the taxpayer's failure to take reasonable care in the making of a statement in compliance with a taxation law (s 284-75(1) and Item 3 of s 284-90(1)) or because the shortfall amount resulted from the taxpayer asserting the application of a taxation law in a way that was not reasonably arguable (s 284-75(2); Item 4 of s 284-90(1)), the Tribunal found that the taxpayer had made statements false in a material particular resulting in a shortfall amount from a failure by the taxpayer to take reasonable care to comply with a taxation law. As to the second basis, the Tribunal found, however, that the shortfall amount did not result from the taxpayer treating an income tax law as applying in the matter in a way that was not reasonably arguable because, viewed objectively, Sanctuary Lakes adopted a position as to the deductibility of the Item 5 expenditure which accommodated room for rational argument as to an entitlement to the deduction.
201 Having made those findings, the Tribunal then considered the question of the exercise of the discretion under s 298-20 of Schedule 1. The Tribunal began that discussion at [208] and then at [209] the Tribunal said this:
The taxation scheme is now based on a philosophy of self-regulation. A taxpayer such as Lakes submits returns on the basis that they contain information that is correct and on the understanding that the Commissioner will not, unless conducting an audit, generally question it in making an assessment on the basis of it. In light of these matters and with one exception, I do not consider that there are grounds for remitting the penalty and affirm the Commissioner's decision regarding penalty. The one exception relates to its claim in relation to Issue 5. I have found at [196] that there was room for a rational argument that, viewed objectively, Lakes was entitled to a deduction in relation to that issue. In view of the object of the penalty regime that seems to me to justify the remission of the penalty imposed in relation to its claim for a deduction of $1,275,800 in the 2003 income year for [the relevant expenditure].
[emphasis added]
202 As to the decision, the Tribunal said this at [210]:
In relation to Issue 5, I set aside the Commissioner's decision. That means that no penalty is imposed in relation to Lakes' claim for a deduction of $1,275,800 in the 2003 income year for expenditure in relation to its obligations [arising under a particular Act].
203 In exercising the discretion under s 298-20 of Schedule 1, the Tribunal not only regarded the notion that there was room for rational argument that Lakes was entitled to a deduction as claimed, as a relevant consideration, it exercised the discretion on the footing that that consideration coupled with the object of the penalty regime was determinative of the exercise of the discretion. It did so on the footing that the object of the penalty regime justifies the remission of the penalty imposed by the Act on the taxpayer to zero. The taxpayer's liability to a penalty arose under Division 284 having regard to the integers of s 284-75(1) and the intersection of that section with s 284-80, s 284-85 and s 284-90 of Schedule 1. The object of Division 284, as recited in s 284-10 of Schedule 1, is to provide a uniform administrative penalty regime for all taxation laws to enable administrative penalties to apply to entities that fail to meet their obligations under those laws in relation to five particular topics as already discussed.
204 The expression of the object of the Division (of uniformity of application of the administrative penalty regime) does not provide a proper foundation upon which the discretion may be exercised such that the penalty imposed by the Administration Act upon a taxpayer in failing either by itself or by its agent to take reasonable care in making a statement to the Commissioner, found to be false or misleading in a material particular and one which results in a shortfall amount, may be reduced to zero on the footing that the conferral of the discretion coupled with the "object of the penalty regime" (which must be a reference to the object of the Division under which liability to the penalty in issue arose) justifies, as a determinative exercise of the discretion, a conclusion that because the claim made by the taxpayer was nevertheless reasonably arguable, the conduct penalty imposed on the taxpayer is to be reduced to nothing.
205 In exercising the remittal discretion, the Tribunal gave no consideration at all to the circumstances of the conduct upon which the quantum of the penalty was determined by operation of the Act.
206 Upon a proper exercise of the discretion, the Tribunal might or might not conclude that the penalty imposed by the Administration Act on the taxpayer in failing to take reasonable care is to be remitted to zero. That is entirely a matter of merits assessment in the exercise of the discretion for the Tribunal in determining where the balance of factors lies. However, the exercise of the discretion must take account of the statutory scheme, the foundation upon which the Administration Act imposes the penalty and the questions that need to be examined in exercising the discretionary power to remit the penalty.
207 The Tribunal must be taken to have asked itself the question, does the object of the penalty regime justify the exercise of the discretion conferred by s 298-20(1) of Schedule 1 so as to remit the penalty imposed upon the taxpayer by operation of s 284-75(1), s 284-80, s 284-85 and s 284-90 of Schedule 1, to nil because the statement made to the Commissioner in the absence of reasonable care nevertheless gave rise to a reasonably arguable claim for a deduction.
208 The penalty regime under which Sanctuary Lakes became liable to an administrative penalty was that contained in s 284-75(1) and the Parliament selected the statutory method for determining the amount of the penalty by reference to the classes of conduct set out in s 284-90(1) of Schedule 1. The purpose of that statutory method is to discourage a taxpayer (either by itself or its agents) from engaging in an intentional disregard of a taxation law, recklessness and a failure to take reasonable care in the making of statements to the Commissioner about the material particulars. The Administration Act has not created an exception from liability to penalty in circumstances where a taxpayer has failed to take reasonable care but has nevertheless made a claim which is reasonably arguable. Nor has the Act effected a reduction in the amount of such penalty on such a basis. Nor has the Act released a taxpayer from a penalty on the footing that notwithstanding that it engaged in a failure to take reasonable care, the taxpayer nevertheless made a claim which was reasonably arguable.
209 In exercising the discretion under s 298-20(1) to remit, the Tribunal was required to ask itself, having regard to the evidence, what were the circumstances surrounding the failure on the part of the taxpayer or its agent to exercise reasonable care in making the statement to the Commissioner that might explain the conduct the subject of the penalty and 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 by the Administration Act on the footing of a failure to take reasonable care in making the statement, the penalty ought nevertheless be reduced either in whole or in part, and as in this case, to nothing.
210 Those questions were not asked nor analysed in the two short paragraphs of the Tribunal's reasons at [208] and [209] dealing with the topic of remittal of the penalty. No consideration is given to the relationship between the penalty scheme adopted by Part 4-25 of the Act and the discretion conferred under s 298-20, and in particular, the intersection between those sections within Division 284 giving rise to the penalty and the power conferred by s 298-20(1) to remit the penalty in whole or in part.
211 In that sense, the exercise of the discretion failed to have regard to the statutory scheme and the taxpayer's failure to take reasonable care. The exercise of the discretion failed to reflect the correct questions to be asked under s 298-20 in the context of Part 4-25 of the Administration Act. By failing to ask the correct question, and by approaching the exercise of a discretion on the determinative footing that because the taxpayer ultimately made a claim which was reasonably arguable the conduct penalty imposed on the taxpayer by the Act is to be remitted to zero, the Tribunal fell into error of law in the exercise of the discretion.
212 Accordingly, the Commissioner's appeal ought to be upheld in my view and the question of remittal of the penalty in relation to Issue 5 ought to be remitted to the Tribunal for further determination.
I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.