Xin v Chief Commissioner of State Revenue

Background

1. Contracts for the sale and purchase of the Castle Hill property were exchanged on 29 October 2019: Court Book (CB) page 12. (Ms Xin claims the 'effective date' of the contract was 25 October 2019 since that is the date she paid the 10% deposit for the purchase, but 29 October 2019 seems the more reliable date, as referenced above; see also CB pages 27 and 110.)
2. Prior to the contract date, Ms Xin signed a Purchaser/Transferee Declaration in respect of the property: CB pages 108-111. The document, evidently signed on 15 October 2019, includes the statement that Ms Xin is (a) a foreign person, and (b) 'an exempt permanent resident who will occupy the property as their principal place of residence for a continuous period of 200 days within the first 12 months after the liability date (date of agreement)'.
3. Ms Xin flew out of Australia, bound for China, on 29 October 2019. She claims the trip was necessary as a result of the illness of her mother, who was subsequently admitted to hospital, in China, on 18 November 2019.
4. Ms Xin flew back to Australia on 26 February 2020. She claims she started residing in the Castle Hill property on that date, and continued to do so until 9 September 2020 (CB page 157), when she flew to China to be with her mother again. She didn't return to Australia until 7 December 2022: CB page 13.
5. On 23 October 2023 the Chief Commissioner issued a Notice of Investigation to Ms Xin in respect of a potential liability to surcharge purchaser duty. Ms Xin's response to the notice did not persuade the Chief Commissioner that she had occupied the Castle Hill property as her principal place of residence for the required continuous period of 200 days within the first 12 months after the liability date of 29 October 2019.
6. In fact, Ms Xin's response positively confirmed she had not done so. She conceded she had not lived in the property for a continuous period of 200 days during 2020. By her reckoning she had accrued only 197 days. She stated 'I am so shocked by this figure' (CB page 23): she seems to have initially thought the figure was 202 days. I assume the discrepancy stems from her thinking the agreement for purchase was signed on 25 October rather than 29 October, but while that might give her a few extra days in Australia during the first 12 months, it doesn't add to the number of consecutive days she could have lived in the property itself.
7. As there is no flexibility in the requirement to use and occupy the property for a continuous period of at least 200 days within the first 12 months, Ms Xin was right to concede that she is liable to the surcharge purchaser duty. As already indicated, the only remaining issue concerns the imposition of interest and penalty tax. Nevertheless, I provide a very brief outline of the surcharge purchaser duty legislation, so the concept of 'tax default' (on which the interest and penalty tax depend) can be placed in a proper context.

Relevant legislation - surcharge purchaser duty

1. It is not necessary to set out this legislation in any detail. It is sufficient to note the following (references are to provisions in the Duties Act 1997 (NSW)): 1. An agreement for the sale or transfer of residential-related property to a foreign person is a dutiable transaction on which surcharge purchaser duty is chargeable: s 104L(1)(b)(i); 2. The duty is to be charged as if the agreement for the sale or transfer were a transfer: s 104N(1); 3. The transfer is taken to have occurred when the agreement was entered into: s 104N(2); 4. The liability for the surcharge purchaser duty arises when the transfer occurs (in other words, when the agreement is entered into): ss 12 and 104Q; 5. If the duty is paid within 3 months after the liability to pay the duty arises, there will be no tax default for the purposes of the TA Act: s 104W.
2. By those provisions the surcharge purchaser duty should have been paid by 29 January 2020.

Relevant legislation - interest and penalty tax

1. A failure by a taxpayer to pay, in accordance with a taxation law, the whole or part of tax that the taxpayer is liable to pay is called a tax default: TA Act, s 3(1). Ms Xin's failure to pay the surcharge purchaser duty by 29 January 2020 constitutes a tax default.

Interest

1. If a tax default occurs, the taxpayer is liable to pay interest on the amount of tax unpaid, calculated on a daily basis: TA Act, s 21(1).
2. The interest rate is the sum of the market rate component, and the premium component: TA Act, s 22(1).
3. In Ms Xin's case, interest totalling $29,938.27 was imposed, calculated from 29 January 2020 to 2 February 2024, the date on the Duties Notice of Assessment.

Remission of interest

1. Section 25 of the TA Act provides for the remission of interest. On 1 February 2024, s 25 was amended to provide as follows: 25 Remission of interest (1) The Chief Commissioner may remit interest. (2) The Chief Commissioner may issue guidelines setting out how interest must be remitted under this division. (3) If guidelines are issued, interest must be remitted only in accordance with the guidelines. (4) The imposition or remission of penalty tax is not relevant to the imposition or remission of interest.
2. Prior to that amendment, s 25 provided: 25 Remission of interest The Chief Commissioner may, in such circumstances as the Chief Commissioner considers appropriate, remit the market rate component or the premium component of interest, or both, by any amount.

Penalty tax

1. In addition to interest, a penalty of 25% is imposed on a tax default: TA Act, s 27(1).
2. However, the Chief Commissioner (or the Tribunal on review) may determine that no penalty is payable if satisfied the taxpayer took reasonable care, or the tax default was beyond the control of the taxpayer: TA Act, s 27(3).
3. The penalty that would ordinarily be imposed at 25% will be reduced to 20% if the taxpayer makes a disclosure during an investigation: TA Act, s 29(1).

Remission of penalty tax

1. Section 33 of the TA Act provides for the remission of penalty tax. On 1 February 2024, s 33 was amended to provide as follows: 33 Remission of penalty tax (1) The Chief Commissioner may, in such circumstances as the Chief Commissioner considers appropriate, remit penalty tax by any amount. (2) The imposition or remission of interest is not relevant to the imposition or remission of penalty tax.
2. Prior to that amendment, s 33 provided: 33 Remission of penalty tax The Chief Commissioner may, in such circumstances as the Chief Commissioner considers appropriate, remit penalty tax by any amount.
3. In Ms Xin's case, penalty tax of $15,984.00 was imposed, calculated at the reduced rate of 20%. The reduced rate reflected the fact that Ms Xin co-operated with the Chief Commissioner during the investigation.

The claim for relief from interest and penalty tax

1. Ms Xin's claim for relief is based on the following: 1. Ms Xin's mother's critical illness necessitated her departure from Australia before she had met the 200-day residence requirement; 2. COVID-19 travel restrictions and lockdowns, which were beyond her control, contributed to the 3-day shortfall; 3. Ms Xin's personal circumstances, and in particular the mental and physical stress she was suffering as a result of her mother's illness, should be taken into account; 4. Ms Xin took reasonable care to comply with her duty obligations by relying on advice given to her by the solicitors acting for her on the purchase of the property.

Ms Xin's mother's illness

1. In effect, Ms Xin claims she had to leave Australia on 29 October 2019 and 9 September 2020 to help look after her mother, who was seriously ill in China. Implicit in the claim is that, but for those unavoidable trips, she would have met the 200-day requirement. The departure on 9 September 2020 had a particularly significant impact since it meant she was just 3 days short (assuming she had lived in the Castle Hill property continuously since her departure).
2. In my mind there is still some doubt as to whether she actually lived in the Castle Hill property as her principal place of residence for those 197 days. She claims she did (and for some of the period she says her daughter and her husband lived there with her), and in support of the claim she provided evidence that she had notified her banks that this was now her address, and electricity accounts were issued in her name to that address. But the electricity consumption is remarkable low, and possibly insufficient to support her claim. I don't need to make a clear finding on this question since Ms Xin concedes she didn't live there for the required period anyway.
3. But even accepting, in Ms Xin's favour, that she started living in the Castle Hill property when she returned from China on 26 February 2020, she applied in June 2020, and was granted, permission to depart Australia by way of an exemption from COVID-19 travel restrictions. She said she wanted to leave immediately on receiving permission, but she had to delay the departure because her daughter, who is an Australian citizen, needed a visa to enter China. Of course, if she had left in June that would have made it impossible for her to meet the residence requirement.
4. In any event, the tax default isn't the failure to meet the 200-day residence requirement; it is the failure to pay the surcharge by 29 January 2020. The only reason for the late payment of the surcharge seems to be that Ms Xin was unaware of her liability until notified by the Chief Commissioner.

COVID-19 travel restrictions and lockdowns

1. Ms Xin flew to China on the date of the agreement, 29 October 2019, and stayed there for 3 months. She claims she intended to return to Sydney on 6 February 2020 but had to change her plans. Indeed, she had booked flights for herself and both her parents to travel from Shanghai to Sydney on that date, and to return to Shanghai on 2 May 2020 (CB page 299). However, her parents, neither Australian citizens nor permanent residents, were prevented from entering Australia because of COVID-19 restrictions and as a result Ms Xin cancelled her ticket and rebooked to travel on 26 February 2020 instead.
2. Ms Xin's claim that the travel restrictions and the resultant delay in her return to Australia were beyond her control is difficult to accept. She has not explained why she had to change her own travel plans once she discovered her parents were prevented from entering Australia. Furthermore, it is curious that the initial booking was for a return flight which, if it had gone ahead, would have made it impossible for Ms Xin to satisfy the residence requirement anyway - even if she had turned around straight away and flown back to Sydney the next day.
3. Ms Xin also claims the travel restrictions and lockdowns prevented her from seeking legal advice about her tax default. But this claim is difficult to reconcile with Ms Xin's initial understanding (even up until she provided her response in November 2023 to the Chief Commissioner's Notice of Investigation) that she had actually met the residence requirement, which from her perspective would have made it unnecessary to seek such advice in the first place.

Ms Xin's personal circumstances

1. Apart from the undoubted anxiety arising from her mother's serious illness, Ms Xin suffered heartbreak through a miscarriage in May 2020 - while she was in Australia. It is difficult to see how that circumstance contributed to the tax default, since at that stage, Ms Xin's understanding was that she was still on track to meet the residence requirement.

Reasonable care

1. Ms Xin claims to have taken reasonable care to comply with the law by relying on the advice given to her by her conveyancer. This claim seems to assert that she was advised she needed to be in Australia for at least 200 days in the first 12 months after the date the agreement was entered into, rather than the more stringent requirement of actually living in the Castle Hill property for a continuous period of 200 days. On the evidence provided I am not satisfied she was advised that way.
2. The only document that throws any, albeit dim, light on the question is the Client Information checklist provided by the conveyancer (CB page 499). This contains a handwritten note in relation to stamp duty: '$4% - exempted - complied 200 days. Confirmed double'. With no further explanation of the meaning of those notations I decline to find that the conveyancer advised Ms Xin in the way she claims.

Consideration - interest

1. The current version of s 25 of the TA Act, dealing with the remission of interest, authorises the Chief Commissioner to issue guidelines setting out how interest must be remitted. I was informed the Chief Commissioner has not issued any such guidelines; nevertheless I was encouraged to exercise the remission discretion in accordance with guidelines issued under an earlier version of s 25.
2. Those guidelines are contained in CPN 024: Interest and penalty tax guidelines. While noting the Chief Commissioner will assess 'all facts and circumstances affecting the tax default before deciding to either remit any or all of the interest', the commentary is confined to a discussion of circumstances outside the control of a taxpayer and the concept of reasonable care. That commentary may not provide sufficient guidance for the Chief Commissioner's officers tasked with making remission decisions on a day-to-day basis. For that reason I encourage the Chief Commissioner to consider including in any future guidelines a broader range of circumstances that may warrant remission of interest, whether in whole or in part.
3. One of the circumstances outside the control of a taxpayer, dealt with in CPN 024, is 'where it is impossible to lodge or pay on time (excluding financial incapacity including hardship)'. It seems to me this is precisely the circumstance applying in Ms Xin's case. I will explain why.
4. The exemption Ms Xin hoped to attract is found in s 104ZKA of the Duties Act. It was, in fact, available to her prospectively because she was an 'exempt permanent resident' (s 104ZKA(2)) since: 1. She was a permanent resident; and 2. The Chief Commissioner was satisfied that she intended to use and occupy the Castle Hill property as a principal place of residence in accordance with the residence requirement.
5. That prospective exemption would be confirmed, and would become permanent, only upon satisfaction of the residence requirement in s 104ZKA(4). This requires actual use and occupation of the property as Ms Xin's principal place of residence for a continuous period of at least 200 days within the first 12 months after the liability date of 29 October 2019. If the residence requirement wasn't satisfied the prospective exemption would be treated as never having applied: s 104ZKA(6).
6. Against that background it is important to examine Ms Xin's understanding, as at 29 January 2020, of her chances of ultimately satisfying the residence requirement. At the time, she was in China, planning to come back to Australia. She knew the exemption was potentially available - albeit she may not have been clear on the strict requirements. But she knew, at the very least, that she wouldn't get the exemption if she didn't spend at least 200 days in Australia in that first 12-month period. And on 29 January 2020, there were still 274 days until the end of that period.
7. The point is that on 29 January 2020 she didn't know - indeed, she couldn't know - whether she would ultimately satisfy the residence requirement. So she also couldn't know whether or not she would have a liability to pay the surcharge purchaser duty. She wouldn't know that until the point in time at which it became impossible for her to satisfy the requirement. That point in time was on 9 September 2020, the day on which she left Australia without having satisfied the residence requirement, and when there weren't enough days left in which she could do so.
8. In Ms Xin's circumstances it is inevitable that she would not pay the surcharge purchaser duty on 29 January 2020. It is not reasonable that she should pay interest from that date. Instead, it is reasonable that any interest payable from 29 January 2020 to 9 September 2020 be remitted. That remission applies to both the market rate and the premium component.

Consideration - penalty tax

1. In the preceding paragraphs I have concluded that Ms Xin should not have to pay interest in respect of a particular period of time. That is not because there was no tax default during that period but because it was impossible, in a practical sense, for her to identify during that period that she even had a tax liability.
2. But the tax liability eventually crystallised, and she didn't pay it. That amounts to a tax default.
3. Because I am not satisfied Ms Xin took reasonable care, or that the tax default was beyond her control, I am unable to determine under s 27(3) of the TA Act that no penalty is payable. That brings me to the question of remission under s 33 of the TA Act.
4. While the discretion in s 33 appears on its face to be unfettered, the Chief Commissioner submits it must be exercised in a manner that is guided by the underlying purpose of the relevant legislation and not in a way that would defeat the fundamental objectives of the legislative scheme. I agree with that submission.
5. It seems reasonably clear to me that the legislative scheme takes as its starting position that a person who fails to comply with the law will pay not only the tax that is payable, but also a penalty for not paying the tax in the first place. The standard penalty of 25% applies unless the taxpayer discloses the default during an investigation, in which case the penalty will be 20%.
6. The legislation relies on people assessing their own liability and telling the Chief Commissioner what it is. In surcharge purchaser duty cases where the principal place of residence exemption is claimed, the self-assessment nature of the provisions requires taxpayers to monitor their use of a property to see whether they have met the residence requirement, and to notify the Chief Commissioner in a timely fashion if it turns out the requirement has not been met.
7. This case is an entirely typical example of its kind. It involves a person who said she would meet the residence requirement but failed to do so, and then didn't notify the Chief Commissioner of the default although there was no impediment to her doing so. To excuse such a case from the penalty, or even to reduce the penalty when there is nothing unusual about those bare facts, would be to undermine the very purpose of the penalty provision in the first place.
8. I am not satisfied this case contains anything unusual or out of the ordinary that justifies any remission of the penalty tax.

Orders 1. Remit the assessment to the Chief Commissioner for recalculation of the amount of interest payable, so as to remove any interest imposed for the period 29 January 2020 to 9 September 2020. 2. All other components of the assessment are confirmed.

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 November 2024