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ACT CIVIL & ADMINISTRATIVE TRIBUNAL
COMMISSIONER FOR ACT REVENUE v G KALSBEEK PTY LTD (Appeal) [2015] ACAT 90
AA 32 of 2015 (AT 113 of 2014)
Catchwords: APPEAL – payroll tax – penalty tax – whether the tax default occurred solely due to circumstances beyond the taxpayer’s control
Legislation cited: Tax Administration Act 1999 s 31
Payroll Tax Act 1987
Payroll Tax Act 2011
List of
Texts/Papers cited: Revenue Circular GEN006.1 Penalty Tax
Tribunal: Mr W.G Stefaniak AM – Appeal President
Mr C.G Chenoweth – Senior Member
Date of Orders: 23 December 2015
Date of Reasons for Decision: 23 December 2015
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ACT CIVIL & ADMINISTRATIVE TRIBUNAL AA 15/32
BETWEEN:
COMMISSIONER FOR ACT REVENUE
Appellant
AND:
G KALSBEEK PTY LTD
Respondent
TRIBUNAL: Mr W.G Stefaniak AM – Appeal President
Mr C.G Chenoweth – Senior Member
DATE: 23 December 2015
ORDER
The Tribunal Orders that:
1. The decision of the appeal tribunal is that the appeal is allowed, and the decision appealed from in matter AT 113 of 2014 is set aside. The consequence of this is that the original decision of the appellant is restored and confirmed.
………………………………..
Mr W.G Stefaniak – Appeal President
for and on behalf of the Appeal Tribunal
REASONS FOR DECISION
1. This is an appeal from a decision dated 9 July 2015 in matter number AT 113 of 2014. The case was brought by the respondent against the appellant arising out of a failure by the respondent to pay payroll tax in the ACT. The appellant, after conducting an investigation, determined that the accrued tax be paid together with the consequential imposition of interest and penalties pursuant to the Taxation Administration Act 1999 (‘TA Act’). The liability of the respondent arose under the provisions both the Payroll Tax Act 1987 and the Payroll Tax Act 2011 (collectively referred to as ‘the PT Act’). The respondent then instituted proceedings to contest the extent of the penalties imposed.
2. In the decision on that application, Presidential Member Symons and Senior Member Sinclair (collectively referred to in these reasons as ‘the tribunal’) sitting at first instance determined by order dated 9 July 2015 and the supporting reasons for decision (‘the decision’) that the determination of the appellant be confirmed, except in relation to the imposition of penalty tax. The tribunal determined that the penalty tax imposed for the years 1 July 2007 to 30June2011 inclusive should be set aside and substituted a decision that no penalty tax was payable in relation to the respondent’s tax defaults in each of those financial years. The tribunal upheld the decision of the appellant that penalty tax was payable for the years ending 30 June 2012 and 2013.
3. The appellant now appeals against the decision overturning the order for the payment of the remaining penalty tax. In the appeal notice dated 5August2015 the appellant argued that the decision of the tribunal and its order should be set aside and the decision under review, namely the appellant’s reviewable decision of 28November 2014, should be affirmed.
4. The respondent acknowledges that it was liable to pay the unpaid payroll tax for the years in question[1] and has not sought to contest that finding on appeal. Further, the imposition of interest on unpaid payroll tax is not a matter for review by the ACT Civil and Administrative Tribunal. The only issue for determination on this appeal is whether the penalty tax that was otherwise payable under the TA Act should have been relieved under section 31(6)(b) of the TA Act on the grounds 1 to 5 of the appeal notice. There was a subsidiary question (ground 6) as to whether any of the years during which payroll tax was unpaid should have been treated differently for purposes of deciding whether a penalty should be relieved from, because of the role of certain accountants engaged by the respondent. However, if the appellant is successful on the main argument in grounds 1 to 5, then this subsidiary matter does not need to be considered.
Background
5. The respondent was incorporated in June 2006,[2] with the sole director and shareholder being Mr Geoffrey Kalsbeek (‘the director’). It conducted a business of steel fixing for the construction industry. There were a variable number of employees of the respondent, depending on the amount of work available to it. Evidence at the hearing below indicated that this was between 16and40.[3] There were senior employees who were familiar with the operational side of the business, and the business had an internal accountant.
6. In around 2004, when it appears that the director was working with a partner in a separate business conducting the same sort of activity, the director was diagnosed with Hodgkin's disease, a rare form of cancer of the lymphatic system.[4] It is a serious condition and severely affected the ability of the director to operate that business. The director experienced a period of remission in 2005, and resumed some of his business duties. As a result of the partner moving interstate in 2006, the director decided to start his own business. The respondent was formed with the director as the sole director and shareholder. It appears that about the time of the formation of the respondent, a further serious relapse of the director’s illness occurred and he required aggressive medical treatment.
7. At some time after the incorporation of the respondent, the relapse of the director meant that he was unable to attend to the direction of the business of the respondent. He had difficulty implementing policies and systems in the respondent to manage its affairs, and he handed over the direction of its business affairs to the control of senior employees.[5] At this time, the respondent through the director had also engaged an external firm of accountants and financial advisors to advise the company generally, although the detailed terms of the retainer were not before the tribunal.
8. The health of the director continued to deteriorate, and he had several aggressive forms of medical treatment. Ultimately, through the use of some alternative medical procedures he was able to improve.
9. Around 2010, the director sought to resume his active involvement in the affairs of the respondent but could only do so in a limited capacity. It was not until 2011 when with the assistance of family and employees of the respondent, he was able to work in a more hands-on capacity.[6] During the periods that he was unable to effectively control the business, it was operated at his request by senior employees. The director had expected the accountants to ensure the continued operation of the respondent in compliance with all relevant taxation laws.[7]
10. Following the return of the director to a more active management role in 2011, new accountants were engaged and advice sought regarding the restructuring and rebuilding of the respondent’s business. It had suffered from unmanageable and inefficient growth and cash flow problems during the absence of the director. This culminated in a significant downsizing of the respondent’s operations in 2013.
11. The respondent did not pay payroll tax on the wages of its employees in relation to the period from the 2007/8 financial year to the 2012/13 financial year. The respondent does not dispute its liability to pay that tax and the interest charged on it, but disputes the penalty tax imposed.[8]
12. The level of penalty tax is a percentage of the original tax, based on the appellant’s consideration of the culpability of the taxpayer in failing to make the original payment. The rates of penalty tax are prescribed by section 31 of the TAAct. The penalty tax had been imposed by the decision of the appellant following an investigation into the affairs of the respondent. That investigation had been triggered by an enquiry by the New South Wales payroll tax office to the respondent, in which the respondent had declared that its operations were all in the ACT. Presumably information passed between the two offices, as a result of which the appellant commenced an investigation into the payroll tax affairs of the respondent.
The legislation
13. Payroll tax is payable on the amounts of wages and benefits paid by an employer to employees in the Australian Capital Territory, in accordance with the PT Act. The liability for payment of payroll tax is subject to a threshold, so that if an employer's wages for a given year fall below it no payroll tax becomes payable. The salaries and benefits paid by the respondent in the years in question exceeded the payroll tax limits for those years, and accordingly payroll tax was payable.
14. The TA Act sets out the provisions relating to the enforcement of payroll tax and other revenue obligations owing to the Australian Capital Territory. The Act imposes penalty tax in circumstances where there has been a tax default (a failure to pay the correct tax), depending upon the circumstances of the taxpayer. The provisions of section 31 of the TA Act are set out below:
31 Amount of penalty tax
(1) The amount of penalty tax payable in relation to a tax default is 25% of the amount of tax unpaid, subject to this division.
(2) The amount of penalty tax payable in relation to a tax default is 50% of the amount of tax unpaid if the commissioner is satisfied that the tax default was caused wholly or partly by a failure by the taxpayer (or a person acting on behalf of the taxpayer) to take reasonable care to fulfil the taxpayer’s obligations under a tax law.
(3) Subsection (2) does not apply if the tax payer satisfies the commissioner that the taxpayer (or a person acting on behalf of the taxpayer) had a reasonable excuse for the failure.
(4) Subsections (2) and (3) apply to a tax default that happened before their commencement in the same way as they apply to a tax default that happened after their commencement.
(5) The amount of penalty tax payable in relation to a tax default is 75% of the amount of tax unpaid if the commissioner is satisfied that the tax default was caused wholly or partly by the intentional disregard by the taxpayer (or a person acting on behalf of the taxpayer) of a tax law.
(6) No penalty tax is payable in relation to a tax default if the commissioner is satisfied that—
(a) the taxpayer (or a person acting on behalf of the taxpayer) took reasonable care to comply with the tax law; or
(b) the tax default happened solely because of circumstances beyond the taxpayer’s control (or if a person acted on behalf of the taxpayer, because of circumstances beyond either the person’s or the taxpayer’s control) but not amounting to financial incapacity.
Note The commissioner’s decision to impose penalty tax is an internally reviewable decision (see s107, def internally reviewable decision), and the commissioner must give an internal review notice to the taxpayer (see s107B).
15. The section imposes penalties on a taxpayer at varying rates, depending upon the appellant's view of the circumstances and intention of the taxpayer in failing to pay or avoiding the tax. It also provides in subsection 31(6)(b) circumstances where no penalty tax is payable, notwithstanding that there has been a tax default. It is these provisions of the TA Act that are the subject of this appeal.
The evidence in the hearing below
16. In the hearing before the tribunal, evidence was provided by way of a statement from the director, together with oral evidence that he gave, and he was cross-examined. In the director’s statement of 16 March 2015, he set out that he and his father had established a steel fixing business in the 1980s. It was in 2006 that the respondent was incorporated as a result of one of his business partners moving to Queensland. The decision of that partner was directly related to the health of the director.[9]
17. The director’s statement sets out in detail his medical condition, and the steps that he had taken to continue the business while receiving medical treatment for his serious illness. That statement indicated that the director had suffered a serious relapse in 2006 (apparently shortly after the incorporation of the respondent) and as a result, the director was unable to continue to manage the business affairs of the respondent. He placed the control of the business affairs in the hands of senior employees of the respondent. He also engaged external accountants and financial advisors to provide assistance in the management of the company and to ensure its continued operation and compliance with all relevant requirements, including taxation laws. The director stated that while those employees did their best, they lacked the skills and experience to effectively manage the operations of the respondent. During this period due to a lack of leadership and management oversight, the business operations of the respondent expanded in a significant and unsustainable manner.[10]
18. Once the director returned to a more active role in the business in 2011, he realised that the employees had not had the capacity to properly manage the business, and that the advice and support that he had expected from his financial advisers had not been provided. Over the next two years, he engaged new accountants and sought advice regarding the restructuring of the business. The director has been in some form of active management of the company since 2011. However, he continues to suffer from both physical and psychological symptoms as a result of his illness.