Death and taxes: Commissioner of Taxation v Ross
In this case update, Tax Bar Association member Laura Mills discusses the recent decision of Derrington J in Commissioner of Taxation v Ross  FCA 766, in which the Federal Court considered whether the intervening death of the taxpayer was a matter relevant in the circumstances to the exercise of the discretion to wholly or partially remit an administrative penalty pursuant to s 284-220 of Sch 1 to the Taxation Administration Act 1953 (Cth). A PDF copy of this article is available to download below.
In Commissioner of Taxation v Ross  FCA 766 (Ross), Derrington J considered the matters relevant to the exercise of the discretion to wholly or partially remit an administrative penalty pursuant to s 284-220 of Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA). He also considered the taxpayer’s onus under s 14ZZK(b)(i) of the TAA.
Background and AAT decision
The Commissioner had audited two taxpayers, Mr and Mrs Ross, and issued amended assessments that resulted in shortfalls and the imposition of administrative penalties. After unsuccessfully objecting to the decisions, the taxpayers applied to the AAT for review of the objection decisions. After the Tribunal heard the evidence, but before it gave its decision, Mr Ross died.
The Tribunal partly allowed the applications. In doing so, it wholly remitted the penalties imposed on Mr Ross, and partially remitted those imposed on Mrs Ross. The Tribunal had regard to Mr Ross’ death including the purpose that would be served in persisting with penalties against Mr Ross and the unusual consequences on Mrs Ross (particularly as she had been left to raise her daughter with special needs). On appeal, Derrington J described s 298-20 as being in broad and linguistically unfettered terms which intends to confer a wide and flexible discretion, but that such a discretionary power may only be exercised for the purposes for which it is granted and subject to the implied restrictions which exist in the legislation.
His Honour considered Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483, in which Griffiths J observed that the discretion required there to be circumstances that could be regarded as mitigating the taxpayer’s behaviour in some way. Further, the question was whether there was something in the circumstances giving rise to the imposition of the penalties which rendered the imposition of the fixed rate of penalty inappropriate in the sense of it being unreasonable, unjust or harsh. In such circumstances, the taxpayer’s culpability is less than that deserving of the automatic level of penalty. Therefore, the consideration in Sanctuary Lakes was not one of whether the penalty imposed was inappropriate having regard to circumstances which were divorced from the contravening conduct for which it was imposed.
Derrington J concluded that the relevant considerations are those which concern circumstances that could be regarded as mitigating the taxpayer’s behaviour in some way. That is, those which go to reducing the taxpayer’s culpability for the circumstances which brought about the imposition of the penalty. Other matters are necessarily irrelevant.
In the circumstances of Ross, Mr Ross’ death did not constitute a circumstance that could be regarded as mitigating his or Mrs Ross’ behaviour in some way insofar as it gave rise to the imposition of the penalties. Accordingly, it was not a circumstance relevant to the discretion to remit. Accordingly, his Honour held that the Tribunal erred in taking into account irrelevant matters in exercising the discretion to remit. The Court ordered that the purported remission of penalties be set aside.
Given this conclusion, it was unnecessary for the Court to determine the Commissioner’s submission that any circumstance occurring after the conduct which gives rise to the imposition of a penalty are necessarily irrelevant to the exercise of the discretion to remit in s 298-20. The Court also considered that the Tribunal had denied the Commissioner procedural fairness by failing to provide him with an opportunity to make submissions as to the impact of Mr Ross’s death on the issue of remission.
Other issues on appeal – taxpayer’s onus under s 14ZZK(b)(i)
The Commissioner also succeeded on other aspects of the appeal. The Court accepted that the Tribunal failed to correctly apply the statutory onus carried by the taxpayers under s 14ZZK(b)(i) of the TAA to show that the Commissioner’s assessment of their taxable income was excessive relative to their actual taxable income. The parties generally agreed that the taxpayers bear the burden of proving, on the balance of probabilities, both that the assessment is excessive and, also, what the assessment should have been to make the assessment right or more nearly right. A taxpayer must positively prove what their taxable income actually is and that onus is not satisfied by merely showing that some element of the Commissioner’s assessment is wrong.
The Court also accepted the Commissioner’s submission that no properly instructed Tribunal, which considered all of the available material, could conclude that the taxpayers had discharged the required onus. However, the Court was not satisfied that it had any power to exercise the Tribunal’s power to affirm the objection decisions. Mrs Ross also successfully cross-appealed, as the Tribunal’s two-year delay in giving its decision gave rise to a real and substantial risk that the Tribunal’s ability to assess the issues in the applications was impaired. Therefore the Court ordered that the matter be remitted to the Tribunal for re-hearing without the hearing of further evidence.
By Laura Mills, Barrister at the Victorian Bar
Liability limited by a scheme approved under Professional Standards Legislation