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01 Sep 1010 Commissioner's appeal on penalties upheld - White

On 14 July 2010, the Federal Court (Gordon J) allowed the Commissioner’s substantive appeal from the decision of the AAT in relation to the 2000 year and dismissed the cross-appeal which concerned the 1999 and 2000 years of income: see FCT v White [2010] FCA 730. However, the issue of penalties was deferred.

The Federal Court has now upheld the appeal of the Commissioner in relation to the decision of the AAT to impose penalties of 25% of the taxpayer's tax shortfall rather than the 50% imposed by the Commissioner under the former s 226H of ITAA 1936. The Commissioner argued that s 226H applied on the basis that the tax shortfall was caused by the recklessness of the taxpayer's tax agent. The AAT did not refer to s 226H in its reasons for decision.

The Court said, at paras 15-16:

"Before the AAT, the Commissioner submitted that the wording of former s 226H of the 1936 Act operated by reference to the recklessness of the taxpayer or his tax agent so that if the tax agent was reckless, then a penalty of 50% applied even if the taxpayer was not reckless: see BRK (Bris) Pty Ltd v FCT [2001] FCA 164; [2001] ATC 4111 at [78]...It was not in dispute that the AAT did not expressly refer to s 226H of the 1936 Act. As noted above, there are two aspects to s 226H – the taxpayer or the tax agent. The AAT’s failure to address s 226H of the 1936 Act in relation to the tax agent is an error of law..."

Further, the Court noted that the taxpayer had failed to lead evidence as to the mental state of his tax agent so as to show that his tax agent was not reckless. As a consequence, the Court held that the taxpayer had failed to discharge the onus of proof imposed by s 226H, and allowed the Commissioner's appeals, with the result that the original penalties were restored: FCT v White (No 2) [2010] FCA 942 (Federal Court, Gordon J, 31 August 2010).


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