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Amanda Guruge, June 13 2022

Recent Court Decision on Shortfall Penalties

Automotive Invest v FC of T


The case concerned the Gosford Classic Car Museum, which housed over 400 vintage, veteran and modern cars. The museum was opened in 2016 and charged admission to visitors. However, unlike other museum, most of the items on display were actually available for sale, and this is where the museum made most of its revenue. 

Prior to setting up the museum, Automotive Invest had obtained advice from two external advisors, Fortunity Group Pty Ltd (‘Fortunity’) and PricewaterhouseCoopers (‘PwC’) on any potential LCT obligations. In the witness statement provided by the director of Automotive Invest, the director stated that he ‘spoke about every aspect of [the] proposed business model in Australia in relation to trading luxury cars – what [his] intentions were, what [he] was trying to achieve, and who the key players were, in the automotive business. [He] also gave a detailed explanation of the business model moving forward. … As was with the case with Fortunity, the advice sought from PwC, and received by the applicant, was in the context of the business model [he] wanted to operate in Australia for selling cars; namely, the sale of vehicles under a “museum” concept. As was the case with Paul Bolton for Fortunity, I had discussed with Ryan Smith the entire proposal, including the museum concept and that an admission fee would be charged.’[1]

In the Federal Court case, Automotive Invest was unsuccessful in challenging the LCT and GST assessments. The issue at hand was whether Automotive Invest had imported or acquired the relevant cars for the intention of using the cars to hold as trading stock and for no other purpose, as required by s9-5(1) of the A New Tax System (Luxury Car Tax) Act 1999. Thawley J found that the Commissioner was correct to apply an increasing LCT adjustment, as the cars were being used in the museum for display, which also limited the input tax credits available.  

In addition to the LCT and GST assessment, the Commissioner had assessed penalties under s284-75(1) of Sch 1 to the Taxation Administration Act 1953 (‘TAA53’) on the basis that Automotive Invest had made a false and misleading statement. The penalties were assessed on the basis that Automotive Invest or its tax agent had failed to take reasonable care and imposed a 25% penalty. The Commissioner subsequently remitted 50% of the penalties. 



The Applicant’s application for review was allowed in part:

In making his decision, Thawley J stated at [40] – [43]:

40. So far as concerns the applicant, I have concluded that it knew there was a potential issue and that the probabilities favour that it obtained advice on the issue from PwC. The “issue” to which I refer is the question whether the use or intended use of the cars in the museum might have the consequence that the cars were not being held only as trading stock. The issue was so obvious it is unlikely to have been missed by each of the PwC advisors and the probabilities favour that the issue was discussed by them with the applicant. In reaching that conclusion, I am conscious of the fact that the issues have now been the subject of detailed evidence and argument and that hindsight can, if not consciously corrected, distort an assessment of the events at the relevant time. Without proper evidence from PwC on the topic, it is not possible to reach a positive persuasion that PwC gave advice that the applicant’s position was reasonable or arguable or that the better characterisation of the applicant’s activities was that the cars were being held only as trading stock and for no other purpose. Whilst there will be cases where the failure to call the adviser will not result in a failure to discharge the onus, Sole Luna being an example, there will be cases where the failure does have that consequence – see: Sole Luna at [132(b)], citing Federal Commissioner of Taxation v White (No 2) [2010] FCA 942; (2010) 80 ATR 373 (Gordon J). In my view, the present case is in the latter category for the reasons given. 
41. So far as concerns PwC, and although not strictly necessary to reach a conclusion on the point, the applicant has failed to discharge its onus of establishing that PwC took reasonable care in respect of the Business Activity Statements it lodged. It may be accepted that the “dual use” issue is one which requires characterisation of the applicant’s purpose or purposes and that minds often differ in relation to such questions. The difficulty is that one does not know what PwC considered or advised the applicant or the reasons why. In the circumstances of this case, one cannot properly infer these matters from the arguments which PwC put to the ATO in the context of the dispute and audit. These are arguments advocating the applicant’s case as best PwC could, and it is not possible in the circumstances of this case to infer from the arguments that they also express PwC’s view about the correct answer.
42. Relevantly to whether the applicant took reasonable care, it is not possible to infer that the arguments put to the ATO were part of advice given earlier to the applicant. For all the Tribunal knows, PwC might have advised the applicant that its position was highly unlikely to succeed if the ATO took issue with it or that it gave such advice once the ATO had taken issue with it. It should be recalled that, at the relevant times, PwC was proceeding on an understanding that the relevant test was, in substance, a sole purpose test.
43. It is not necessary to reach a concluded view about whether Fortunity took reasonable care in connection with the statements it made in the Business Activity Statement it lodged, because I have concluded that the applicant has failed to establish that it took reasonable care in that regard.

Discharging the onus of proof - Sole Luna v FC of T

In his decision of Automotive Invest, Thawley J cited Steward J decision in Sole Luna in relation to the types of activities that the taxpayer needs to undertake to discharge the onus of proof that reasonable care was taken by the taxpayer and its agent/s. 

At [132(b) and (c)] Steward J considers this issue:

(b) … there will be cases where a failure to call a tax agent will be decisive in establishing that the taxpayer and the agent did not discharge its onus of proof concerning the issue of reasonable care. The decision of Gordon J in Federal Commissioner of Taxation v White (No 2) [2010] FCA 942; (2010) 80 ATR 373 is illustrative of that principle, although that case concerned “recklessness” and the now repealed s226H of the 1936 Act. Nonetheless, in the circumstances here, I do not consider that the failure to call Mr Skoglund compels a conclusion that the taxpayers were unable to show that they and Mr Skoglund had taken reasonable care in connection with the making of the statement about foreign exchange losses and capital losses in the returns. The critical reason for making that statement was the view formed by the taxpayers’ advisers about the operation of s 8-1, Div 775 and Pt 3-1 of the 1997 Act and former Div 3B of the 1936 Act to the perceived facts. I infer that this view would have been the product of discussions held between Messrs Skoglund, De Zilva and Neil. The evidence before me is that they were working together when addressing the tax outcomes of the migration to Australia. Whilst Mr Skoglund was not called, Messrs De Zilva and Neil both gave evidence before me. They were available to be cross-examined. Mr De Zilva, in particular, gave very detailed evidence about how the restructure of the Wade group took place over time. I would infer that he was the “senior” member of the team on complex issues; in that respect he is a Senior Fellow and lecturer in taxation law at the University of Melbourne. Because Messrs De Zilva and Neil were called to give evidence, and because the shortfall was the product of the view taken about the law or about the evidence in the case of the capital loss, I reject the Commissioner’s submission that the failure to call Mr Skoglund supported the conclusion that the taxpayers had not taken reasonable care.
(c) As to the failure to call Mr Bethune, it was faintly pressed. Given the inference I have drawn about the preparation of the 2015 return for Mr Wade, I doubt whether Mr Bethune could have added much that was useful given that the decision to claim the foreign exchange loss and capital loss was the result of analysis and decisions made in 2013 by Messrs Skoglund, De Zilva and Neil. In my view, the failure to call Mr Bethune did not prevent the taxpayers from showing that they and their agents took reasonable care, for the reasons I have given in relation to the failure to call Mr Skoglund.

At [17]-[20], Gordon J stated in his decision of FC of T v White (No 2) why he considered the taxpayer ‘failed to discharge the onus he bore’:

17. In my view, unlike s 226L, I do not consider that the issue is required to be remitted to the AAT. I say that for a number of reasons. Section 226H operated by reference to the recklessness of Mr White or his tax agent. Ms Sarah McClusky was Mr White’s tax agent. No evidence was lead by or on behalf of Mr White in relation to her mental state. Ms McClusky was not called as a witness. Mr White gave no evidence about the instructions he gave her or the inquiries she made of him at the time she prepared and filed each of his tax returns except to say that he believed that she would not have had access to the “Ruskin Stuff”.
18. The Commissioner submitted, and I accept, that: 
1. Mr White bears the onus of showing that the imposition of penalty at 50% was excessive: s 14ZZK of the Taxation Administration Act 1953 (Cth); Hart v Federal Commissioner of Taxation 2007 ATC 2467, (2003) 131 FCR 203 at [38]; and
2. in the context of s 226H of the 1936 Act, that requires a taxpayer to show that the taxpayer did not act recklessly and the taxpayer’s agent did not act recklessly with regard to the correct application of the taxing Acts.
19. In the present case, Mr White failed to lead evidence as to the mental state of his tax agent so as to show that his tax agent was not reckless. Mr White submitted that he relied upon the advice of Ruskin Financial Services Pty Ltd and that because there was no evidence that he relied upon his tax agent (Ms McClusky) in relation to the arrangement, it was unnecessary to call her to give evidence. I reject Mr White’s submissions. He bore the onus: see [18(1)] above. Moreover, the fact that he relied upon Ruskin in relation to the arrangement does not answer the question posed by s 226H. Section 226H is concerned with the “correct operation” of the taxing Acts to the arrangement, not the arrangement itself.
20. For those reasons, I consider that Mr White necessarily failed to discharge the onus he bore. I note that the fact that s 226H applied a 50% penalty to the tax shortfall in the 1999 year and in the 2000 year was not a conclusion that was inconsistent with any finding by the AAT. Having reached this conclusion on s 226H it, is not necessary to remit the matter to the AAT.

I’ve received a penalty assessment – what do I do now?

If you are unhappy with the assessment (and let’s be honest, most people are unhappy with having to pay a penalty), you have the option to object to the penalty assessment. 

In objecting to penalty assessments, the starting point should be to try to rebut the Commissioner’s assessment for your conduct (sometimes referred to as “level of culpability”) by showing the conduct was either not blameworthy or was at least less “culpable” than originally assessed by the Commissioner. 

As canvassed in the Automotive Invest case, the Commissioner (and the AAT in the Commissioner’s metaphorical shoes) has the power to remit penalties under s298-20 of Sch 1 TAA53. Usually this requires the objecting taxpayer to address both the assessment of liability (“culpability”) for their relevant conduct and alternatively to request that the Commissioner exercise the discretion to remit any remaining penalties (after considering “culpability” arguments). 

The other issue canvassed in Automotive Invest case was the safe harbour principle, which is a protection available under s284-75(6) of Sch 1 TAA53 to taxpayers whose “culpability” has been found to demonstrate a “lack of reasonable care” (not recklessness or intentional disregard) AND the proximate cause of that conduct was the action’s of that taxpayer’s registered tax agent. As a result, any such objection  should expressly address the “safe harbour” protection as a ground and provide evidence that supports the taxpayer’s version of the relevant events. Tax agents generally “own up” to contributing to the tax problem arising however if they do not, this can lead to a conflict of interest between the taxpayer’s interest (not being penalised) and their registered tax agent (their conduct being referred to the Tax Practitioner’s Board). Sometimes, independent advice is the best option to manage such conflicts.

However, as highlighted in each of the cases referenced in the case, if a penalty dispute reaches the court, the court will look to see if the taxpayer has ‘discharged’ their onus of proof to show that they and their tax agent took reasonable care.

How can Tax Controversy Partners help you?

At Tax Controversy Partners, we have experience supporting clients and their advisors who have received assessments for shortfall penalties. We can help you best to deal with the ATO on those issues, including preparing objections and remission submission, supporting you through the appeal process (whether in the AAT or Federal Court) or engaging in settlement discussions with the ATO. 

To seek our help with dealing with the ATO, please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813

[1] Automotive Invest, [8] citing para 8 and 19 of Mr Denny’s witness statement

Written by

Amanda Guruge


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