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04 Nov 09 Taxpayer has mixed success with income tax and GST penalties appeals - Russell

The Federal Court (Logan J) has considered a wide range of issues in his decision whether to remit certain income tax and GST penalties imposed by the Commissioner on the taxpayer and a partnership of which the taxpayer was a partner. The taxpayer had accounting qualifications from New Zealand but was not registered as such in Australia. He performed accounting and managerial work for an Australian third party on behalf of a New Zealand incorporated company.

One issue considered was whether the income received by the New Zealand incorporated company from an Australian company was mainly a reward for the taxpayer’s personal efforts or skills, such that it constituted the taxpayer’s “personal services income” under Div 86 ITAA 1997. This question was answered in the affirmative. Another issue was whether an overseas registered company (the New Zealand incorporated company) could be a personal services entity in relation to the assessment of personal services income of an individual (answered in the affirmative) and whether it was contrary to the Double Taxation Agreement between Australia and New Zealand to attribute the income paid to the New Zealand incorporated company by a third party as the personal services income of the taxpayer (answered in the negative).

Another issue concerned a partnership the members of which were the taxpayer and his wife (from whom he separated during the relevant income years), and in particular, whether the partnership had been dissolved by the giving, by the wife, of a notice of dissolution of partnership after the separation (and, if so, when it was dissolved and what impact such dissolution had on the partnership’s entitlement to claim GST input tax credits. The Partnership Agreement purported to provide that the minimum number of partners might be “one”.

For GST purposes, the Court held that the partnership (whilst in existence) was carrying on a forestry operation enterprise (and thus entitled to input tax credits) but, in contrast, the partnership was not carrying on a separate enterprise of a naturist retreat (and was not therefore entitled to input tax credits).

In relation to the income tax penalties imposed by the Commissioner (on the basis of "intentional disregard"), the Court held that a base penalty of 25% should be remitted in full. Other base penalties imposed in relation to GST were not remitted.

The Court had this to say in relation to the income tax penalties, at para 186:

"There were self-evident gaps, too, in [the taxpayer]’s general law knowledge in respect of matters relevant to income taxation. I am well satisfied that he understood the concept of a company as a separate legal entity having regard to the evidence he gave in relation to [the New Zealand company]. He quite plainly did not though understand that a partnership could not continue to exist with only one member left to carry on business under the partnership’s business name. I thought he was genuinely ignorant in respect of this matter. Such is the pervasiveness of accountants in the provision of taxation advice in Australia it is necessary to remind oneself of the potential limitations in the undertaking of this role that this profession has in terms of training in and understanding of the general law. I mean no disrespect to the Commissioner and his officers in observing that it is sometimes easy, when a matter such as the partnership law issue which I have mentioned seems trite, to classify what is truly and objectively ignorance or genuine misunderstanding on the part of others as intentional disregard."

Russell v FCT [2009] FCA 1224 (Federal Court, Logan J, 30 October 2009).

For a copy of the decision, go here


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