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06 Jun 1212 Reasonable care and RAP penalties must be considered separately - Traviati

The Federal Court (Middleton J) has upheld an appeal by the Commissioner against the decision of the AAT in Traviati and FCT [2011] AATA 478 (8 July 2011).

In that case, the AAT set aside the Commissioner's imposition of a failure to take reasonable care penalty of 25% of the taxpayer's tax shortfall (remitted by the Commissioner to 5% because the taxpayer made voluntary disclosures), on the basis that the taxpayer had adopted a reasonably arguable position in relation to a claim for deductions. The taxpayer had argued that he had a reasonably arguable position because he had relied upon the decision of a single judge of the Federal Court in FCT v Malouf [2008] FCA 497; (2008) 250 ALR 253, who had held that the taxpayer in that case (Malouf) was entitled to claim deductions identical to those claimed by the current taxpayer.

The AAT's conclusions were that:
(a) the reasonably arguable position test (in the former s 226K ITAA 1936) is a higher standard to meet than the reasonable care standard (in the former s 226G ITAA 1936); and
(b) if a taxpayer has adopted such a reasonably arguable position the reasonable care standard should be accepted as having been met.

On appeal, the first issue before the Federal Court was whether the AAT erred in law by finding that as the taxpayer had a reasonably arguable position with respect to his substantive tax liability in each of the relevant income years, the taxpayer therefore necessarily had demonstrated that he and his tax agent had taken reasonable care within the meaning of s 226G of the 1936 Act.

Middleton J held that the AAT had so erred. Middleton J concluded at paras 70-71 as follows:

"The correct approach in construing the 1936 Act and the relationship between ss 226G and 226K is to first consider the text of the legislation and the context in which it is placed. The language of the two provisions reveals two independent standards. Section 226G was concerned with the taxpayer, or their registered agent, taking reasonable care. Reasonable care is a concept familiar to the law, and whilst an objective standard, it considers the subjective circumstances of the individual in question. Likewise, ss 226H and 226J refer to the concepts of 'intentional disregard' and 'recklessness'. These, again, are familiar concepts to the law, and are objective standards with subjective elements...

Whether or not a taxpayer has a reasonably arguable position for the purposes of s 226K, however, is a purely objective test. That is clear from the words that the legislature has used to describe the standard that the taxpayer must meet to avoid a penalty. Put another way, ss 226G, 226H and 226J all examined the means (or process) that the taxpayer had utilised in complying with the Act. Section 226K only examined whether, as an end, the taxpayer had a reasonably arguable position."

The AAT had also held that if it was wrong in the approach that it had taken, it should exercise its discretion under s 227(3) ITAA 1936 to remit the additional penalty tax imposed from 5% to nil. Middleton J upheld the Commissioner's appeal against this finding on the basis that the AAT erred by either taking into account irrelevant considerations or applying the wrong test.

On the basis of these findings, Middleton J upheld the Commissioner's appeal and remitted the matter back to the AAT for determination in accordance with law.

FCT v Traviati [2012] FCA 546 (Federal Court, Middleton J, 1 June 2012).


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