A severe case of the penalties

The Administrative Appeals Tribunal (AAT) has handed down its decision in Peter Sleiman Investments Pty Limited as Trustee for The Sleiman Family Trust and Commissioner of Taxation (Taxation) [2017] AATA 999 (Sleiman). The decision is a timely reminder of the various powers that the Commissioner has to impose penalties on taxpayers.

The case involved the lodgement of returns not necessary by a family trust which was undertaking a property renting business. The taxpayer submitted that it had lodged returns not necessary for numerous income years on the basis that its expenses exceeded the assessable income in each of these income years.

The Commissioner subsequently issued default assessments to the taxpayer resulting in combined taxable income of $8.04 million and a tax liability of $3.739 million for the income years in which returns not necessary were lodged. As a result, the onus of proof was on the taxpayer to substantiate its deductions or that certain amounts were non-assessable in the default assessment income years.

Unsurprisingly, the AAT found in favour of the Commissioner given that the taxpayer was unable to demonstrate the nexus of its outgoings and its passive property renting business. These deductions included 65 cars (including two cars located in a State which the family trust held no property), fitness equipment and firearms. The taxpayer was also unable to support its treatment of certain amounts as non-assessable.

Following the discovery of the tax shortfall, the Commissioner sought to impose administrative penalties on the taxpayer for failing to lodge income tax returns. The Commissioner imposed a 75% base penalty rate on the shortfall and an additional base penalty rate increase of 20% on the shortfall in the default assessment income years following the initial default assessment. The imposition of these penalties result in the taxpayer paying almost $7 million in tax and penalties on $8 million of undeclared taxable income.

In considering the penalties, the AAT concluded that the 75% administrative penalty was appropriate given the “deliberate and inexplicable” actions taken by not lodging the relevant income tax returns. The taxpayer also contended the 20% uplift should be remitted as the non-lodgement was “one single course of conduct”. However, the AAT rejected this contention and stated that this line of argument was the equivalent of:

“asserting that an armed robber who holds up a bank once a year for each of three years is engaging in just one single course of conduct and should therefore be treated more leniently”.

This case is an important reminder of the various powers that the Commissioner has under Division 274 of the Tax Administration Act 1953 to impose substantial penalties on taxpayers. Generally, the quantum of the penalty imposed will be based on the Commissioner’s view as to whether there were inadvertent errors or purposeful actions. In certain circumstances, the Commissioner is also entitled to further increase the penalty for additional indiscretions (as was the case in Sleiman).

Once the Commissioner decides to impose a penalty, the onus is on the taxpayer to provide reasoning as to why the Commissioner should remit that penalty. Factors such as compliance history, the way in which the tax shortfall is discovered and the taxpayer’s co-cooperativeness are considered by the Commissioner in choosing whether to exercise this discretion.

Based on the broad powers given to the Commissioner under Division 274, generally the only avenue to challenge any denied request for remission is for the taxpayer to refer the matter to the AAT (as was the case in Sleiman) or the Courts.