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27 May 13 Golf course losses and expenditure not deductible - Sanctuary Lakes

The Full Federal Court (Edmonds, Greenwood and Griffiths JJ) has dismissed the taxpayer's appeal from the decision of the AAT in Sanctuary Lakes Pty Ltd and FCT [2012] AATA 404 (29 June 2012).

In that decision, the AAT held that the taxpayer was not entitled to deductions for a loss incurred on the sale of memberships in a golf course whose development it had assisted by way of loans, for a loss in respect of its forgiveness of a debt owed by one of the companies associated with the development, and for the cost of 2 items of expenditure which it agreed to undertake in relation to the development of the golf course.

The taxpayer's appeal in respect of each of the matters was dismissed. In relation to the loss on the sale of memberships, the Court held that the loss was clearly a loss of capital. The same applied to the forgiveness of debt. In relation to the deductions claimed for the 2 items of expenditure, the Court upheld the AAT's findings that the obligations to make the expenditure did not arise in the income year in question.

However, the Court also dismissed the Commissioner's appeal from the decision of the AAT to remit in full all penalties in respect of the claim for a deduction for one of the items of expenditure. The AAT had found that the claim for a deduction was "reasonably arguable" and, in deciding whether the taxpayer had exercised reasonable care, appeared to take this into account as a relevant factor, notwithstanding the fact that the Court held in FCT v Traviati [2012] FCA 546 that having a reasonably arguable position and taking reasonable care are independent standards.

In relation to this matter, Griffiths J (with whom Edmonds J agreed) said, at para 245:

"First, accepting that the two standards of failing to take reasonable care and taking a position which is not reasonably arguable are different and independent standards (at least for the purposes of imposing liability to administrative penalty, as to which see Traviati...it is difficult to understand why the latter matter is an irrelevant consideration in exercising the separate power conferred by s 298-20. That is particularly so in a case, such as here, where administrative penalty is imposed on the sole basis of the taxpayer (or its agent) failing to take reasonable care, but it is found that the taxpayer’s position was reasonably arguable. Where penalty is imposed for failing to take reasonable care, why is it not relevant in exercising the separate power of remission under s 298-20 to take into account that the taxpayer nevertheless had a reasonably arguable position? That consideration, when weighed with other relevant considerations, may not mean that the penalty is remitted in whole (or, in some cases, even in part), but why is the consideration irrelevant? It is not a case of the reasonably arguable position of a taxpayer negating an earlier finding of failing to take reasonable care because the two standards are plainly different, but rather taking that position into account in determining the separate question whether it is appropriate to remit the penalty either in whole or in part."

After further analysis, Griffiths J concluded, at para 275:

"The Tribunal plainly gave considerable weight to its finding that Lakes had a reasonably arguable position. In my view the Commissioner has failed to establish any appellable error in the Tribunal’s analysis and findings, particularly when the Commissioner was unable to point to any other aspect of Lakes’ particular circumstances which ought to have been taken into account by the Tribunal but was not."

Sanctuary Lakes Pty Ltd v FCT [2013] FCAFC 50 (24 May 2013)

 


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