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The Administrative Appeals Tribunal has held that dividend payments credited to the loan accounts of shareholders were received by them for purposes of s 44 of the Income Tax Assessment Act 1936 and were assessable in their hands. The Tribunal affirmed the Commissioner’s decision as to the taxpayers’ primary liability, but reduced the penalties on the ground that the taxpayers had not been reckless.

The taxpayers were shareholders in a company, Rocbit. They were also limited partners in a limited partnership; there was one general partner, another company. There were agreements that the partners would contribute their shares in Rocbit to the limited partnership, but the so-called “contribution” was a contribution of a limited nature and not a contribution of the full ownership in any real sense.

Rocbit declared dividends in significant amounts. However, the dividends were not physically paid but were credited to the loan accounts of the respective shareholders on the day following the date of each resolution declaring a dividend.

The taxpayers did not include the amounts of the dividends in their respective returns. Following an audit of their affairs, the Commissioner issued amended assessments including the dividend amounts in their assessable income and imposing penalties calculated on the basis that they had been reckless as to the operation of the income tax law.

On the evidence, the Tribunal agreed that the taxpayers were assessable on the dividend amounts, although the amounts were credited to their loan accounts. Section 44 should be interpreted such that “paid” includes a payment by direction as there is nothing in s 44 or its statutory context to suggest a contrary conclusion is intended.

On the question of penalties, the Tribunal held that the taxpayers had not exhibited recklessness, and the penalties should be reduced accordingly.

The Tribunal observed:

“98. In this case the Applicants sought and relied on the professional services of a qualified firm of solicitors who had a reputation in the field of taxation. The firm which was consulted devised a scheme which included a complex restructure involving multiple steps and complicated agreements which the Applicants themselves clearly did not fully understand. A second opinion from an independent tax advisor was not sought. Clearly in such a situation where the one firm has devised and is advising on the scheme in question, an independent review and analysis of the tax situation would be the preferred course of action.

99. Whether the lack of independent review amounts to recklessness is however a different matter. As mentioned previously, gross carelessness is a substantial threshold to establish and it does not seem to me to be appropriate to label someone who has engaged professional advisors who have expertise in taxation matters as reckless because they have not sought a second opinion. Even if there were some deficiencies in the advice provided, the Applicants would not have been aware of such deficiencies and would have had no basis for assuming any problems with the advice given. A reasonable person would not regard the failure to seek a second opinion as running an unjustifiable risk.

100. The Respondent [Commissioner] has also indicated that the tax agent and solicitor of the Applicants were reckless as to the operation of the Act. This view is largely based on the assertion that there were flaws in the taxation advice provided by the tax agent and solicitor, which were so serious as to make their behaviour reckless as to the operation of the Act.

101. In this respect I note that there are a number of issues raised by the Respondent as to the advice provided, particularly in relation to the availability of rollover relief. Having considered the evidence before me, I am not in a position to comment in detail on the quality of the advice. However, the advice provided to the Applicant’s was reasonably detailed and although some aspects of that advice may be unclear and contrary views are possible, the providing of such advice cannot in my view be described as reckless. In other words that advice does not point to advisors who were so careless as to constitute behaviour, on their part, that could be described as gross carelessness. Two competent and well qualified valuers provided two completely different bases for making the required valuations and the supported valuations were a long way apart. Each valuation had some basis of support which was not unreasonable.”

Re Yazbeck and FCT [2014] AATA 423 (R Deutsch DP, 27 June 2014).

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