Armstrong v Queensland Building Services Authority [2010] QCAT 486

CITATION: Armstrong v Queensland Building Services Authority [2010] QCAT 486 PARTIES: Mr Andrew Thomas Armstrong v Queensland Building Services Authority APPLICATION NUMBER: QR218-08 MATTER TYPE: General administrative review matters HEARING DATE: 8 March 2010 HEARD AT: BRISBANE DECISION OF: James Allen - Member DELIVERED ON: 4 October 2010 DELIVERED AT: BRISBANE ORDERS MADE: The decision of the Queensland Building Services Authority dated 2 September 2008 to refuse to categorise the Applicant as a permitted individual is confirmed. CATCHWORDS : Permitted Individual Part 3A Sections 56AB – 56AH Queensland Building Services Authority Act 1991 APPEARANCES and REPRESENTATION: APPLICANT : Mr Andrew Thomas Armstrong represented by Mr David Simpson of Watson & Quinn Lawyers RESPONDENT: Queensland Building Services Authority represented by Ms Shaheen Aszal, Respondent’s Legal Officer -- 1 of 29 -- QR218-08 / Page 2 of 29 REASONS FOR DECISION History of the application 1. Mr Andrew Armstrong attended a seminar on the Gold Coast in May 1999. The seminar was held by the former Harts Accounting Group and the purpose of the seminar was to discuss the forthcoming goods and services tax and promoting a superannuation investment strategy. At the time of the seminar Mr Armstrong was the sole share holder and director of the company then known as Airwave Air Conditioning Pty Ltd, now known as Dual (Qld) Pty ltd (the Company). Mr Armstrong attended a further meeting in regard to the superannuation investment strategy with accountants employed by the Harts Accounting Group, Mr Ross McSwain and Mr Brian Bower. Mr Bower had been an accountant with the firm of Roberts & Morrow who practise in New South Wales. Roberts & Morrow were the accountants for the Company at that time. Mr Armstrong decided to proceed with the superannuation investment strategy and as a result entered into certain transactions which are described later in these reasons. Those transactions had the effect of creating deductions in the income tax returns for the Company in respect of the 1999 and 2000 income tax years. The Federal Commissioner of Taxation (FCT) subsequently disallowed the deductions which were claimed by the company in respect of the investment strategy and issued amended assessments for both the 1999 and 2000 income tax years. The company objected against the assessments and, following the disallowance of the objections by the FCT, the matter was then appealed by the Company to the Administrative Appeals Tribunal. Senior Member J.W. Constance handed down his decision of 3 November 2006 affirming the decision of the FCT made on 10 March 2005, disallowing the objections of the taxpayer to the disallowance of deductions claimed for the year ended 30 June 1999 and the year ended 30 June 2000. 2. There was no appeal from the decision of Mr Constance and subsequently the Deputy Commissioner of Taxation petitioned for a liquidator to be appointed to the Company. Mr John William Cunningham was appointed liquidator to the Company on 8 May 2008. On 12 May 2008 the Queensland Building Services Authority became aware of the appointment of John Cunningham as liquidator to the Company and that Mr Armstrong was the director of the Company. On 15 May 2008 the Queensland Building Services Authority sent a letter to Mr Armstrong titled “Notice of reasons for proposed cancellation of license” under the excluded individual provisions of the Queensland Building Services Authority Act 1991. On 30 May 2008 the Authority received a letter from Mr Armstrong enclosing certain documents in support of an application to be categorised as a permitted individual under section 56AD of that Act. On 2 September 2008 the Queensland Building Services Authority sent a letter to Mr Armstrong advising that his application to be categorised as a permitted individual had been refused by the Authority. It is this decision of the Queensland Building Services Authority that Mr Armstrong is seeking to have reviewed by the Tribunal. The application for review of the Queensland Building Services Authority decision was filed in the former Commercial and Consumer Tribunal on 29 September 2008. The applicable law 3. The Commercial and Consumer Tribunal was abolished as of 1 December 2009 in accordance with the Queensland Civil and Administrative Tribunal Act 2009 (“QCAT Act”). Section 271 of the QCAT Act states that the Tribunal has, and only has, the -- 2 of 29 -- QR218-08 / Page 3 of 29 functions that the former Commercial and Consumer Tribunal had in relation to the application and the Tribunal can, and can only, make a decision the former Commercial and Consumer Tribunal could have made in relation to the matter under the Commercial and Consumer Tribunal Act 2003 (“CCT Act”). The relevant provisions of the CCT Act are contained in part 6 division 1 specifically sections 101 to 104. In accordance with section 104 of the CCT Act in deciding an application for review of a decision the Tribunal may – (a) confirm the decision being reviewed; or (b) set aside the decision and substitute another decision; or (c) set aside the decision and return the matter to the state agency that made the decision with directions that the Tribunal considers appropriate. 4. In accordance with subsection 104(2) of the CCT Act in substituting another decision, the Tribunal has the same powers as the state agency that originally made the decision. This has been interpreted in various decisions of the former Tribunal as requiring the Tribunal to undertake a fresh hearing of the matter and not merely exercise an appeal jurisdiction. The applicable provisions of the Queensland Building Services Authority Act 1991 (“QBSA Act”) in regard to the review of decisions by the former Tribunal are contained in part 7 division 3 of the QBSA Act, specifically sections 86 and 87. In terms of the functions of the Tribunal, the former Tribunal and the Tribunal have the same decision making powers of review. The powers under the QCAT Act are contained in section 24 of that Act and are in the same words as mentioned in section 104 of the CCT Act 2003. 5. The provisions of the QBSA Act under which the QBSA made the decision under review here are contained in part 3A of that Act and are as follows: 56AB Operation of pt 3A This part has effect despite anything in part 3, but does not apply to— (a) a site supervisor’s licence; or (b) a fire protection occupational licence. 56AC Excluded individuals and excluded companies (1) This section applies to an individual if— (a) after the commencement of this section, the individual takes advantage of the laws of bankruptcy or becomes bankrupt (relevant bankruptcy event); and (b) 5 years have not elapsed since the relevant bankruptcy event happened. (2) This section also applies to an individual if— (a) after the commencement of this section, a company, for the benefit of a creditor— (i) has a provisional liquidator, liquidator, administrator or controller appointed; or (ii) is wound up, or is ordered to be wound up; and -- 3 of 29 -- QR218-08 / Page 4 of 29 (b) 5 years have not elapsed since the event mentioned in paragraph (a)(i) or (ii) (relevant company event) happened; and (c) the individual— (i) was, when the relevant company event happened, a director or secretary of, or an influential person for, the company; or (ii) was, at any time after the commencement of this section and within the period of 1 year immediately before the relevant company event happened, a director or secretary of, or an influential person for, the company. (3) If this section applies to an individual because of subsection (1), the individual is an excluded individual for the relevant bankruptcy event. (4) If this section applies to an individual because of subsection (2), the individual is an excluded individual for the relevant company event. (5) An excluded individual for a relevant bankruptcy event (the first event) does not also become an excluded individual for another relevant bankruptcy event (the other event) if the first event and the other event are both consequences flowing from what is, in substance, the one set of circumstances applying to the individual. (6) An excluded individual for a relevant company event (the first event) does not also become an excluded individual for another relevant company event (the other event) if the first event and the other event are both consequences flowing from what is, in substance, the one set of circumstances applying to the company. (7) A company is an excluded company if an individual who is a director or secretary of, or an influential person for, the company is an excluded individual for a relevant event. Division 2 Categorisation as permitted individual 56AD Becoming a permitted individual (1) An individual may apply to the authority, in the form approved by the Board, to be categorised as a permitted individual for a relevant event if the individual has been advised by the authority, or has otherwise been made aware, that the authority considers the individual to be an excluded individual for the relevant event. (2) However, if as a result of the application the individual is not categorised as a permitted individual for the relevant event, the individual may not, while the individual is an excluded individual for the relevant event, again apply to be categorised as a permitted individual for the relevant event. (3) If the individual applies, the application must include the reasons why the authority should categorise the individual as a permitted individual for the relevant event. (4) If the individual is a director or secretary of, or influential person for, a company that is a licensee, the company is taken to be a party to the application, and may make submissions to the authority about the application. (5) The authority must give its decision on the categorisation within 28 days, or a longer period agreed between the individual and the authority. (6) If the authority does not give its decision within the time required under subsection (5), the authority is taken, for section 86(1)(j) to have decided not to categorise the individual as a permitted individual for the relevant event. -- 4 of 29 -- QR218-08 / Page 5 of 29 (7) Nothing in subsection (6) stops the authority, after the time required under subsection (5) has elapsed, from confirming the authority’s refusal to categorise the individual as a permitted individual for the relevant event. (8) The authority may categorise the individual as a permitted individual for the relevant event only if the authority is satisfied, on the basis of the application, that the individual took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of the relevant event. (8A) In deciding whether an individual took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of a relevant event, the authority must have regard to action taken by the individual in relation to the following— a) keeping proper books of account and financial records; b) seeking appropriate financial or legal advice before entering into financial or business arrangements or conducting business; c) reporting fraud or theft to the police; d) ensuring guarantees provided were covered by sufficient assets to cover the liability under the guarantees; e) putting in place appropriate credit management for amounts owing and taking reasonable steps for recovery of the amounts; f) making appropriate provision for Commonwealth and State taxation debts. (8B) Nothing in subsection (8A) prevents the authority from having regard to other matters for deciding whether an individual took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of a relevant event. (9) If an individual is categorised as a permitted individual for a relevant event, the individual is taken not to be an excluded individual for the relevant event. Division 3 Licence exclusion and cancellation 56AE Exclusion from licence The authority must not grant a person a licence if the person is— (a) an excluded individual for a relevant event; or (b) an excluded company. 56AF Procedure if licensee is excluded individual (1) This section applies if the authority considers that an individual who is a licensee is an excluded individual for a relevant event. (2) The authority must give the individual a written notice identifying the relevant event and stating the following— (a) why the authority considers the individual is an excluded individual for the relevant event; (b) the individual may apply to the authority to be categorised as a permitted individual for the relevant event if the individual has not already done so; (c) the circumstances, stated in subsection (3), in which the authority must cancel the individual’s licence. -- 5 of 29 -- QR218-08 / Page 6 of 29 (3) The authority must cancel the individual’s licence by written notice given to the individual if— (a) the individual has not already applied to be categorised as a permitted individual for the relevant event, and the individual does not apply for the categorisation within 28 days after the authority gives the individual the written notice under subsection (2); or (b) the individual has already applied to be categorised as a permitted individual for the relevant event, or the individual applies for the categorisation within the 28 days mentioned in paragraph (a), but— (i) the authority refuses the application; and (ii) either of the following applies— (A) the period for applying for a review of the decision to refuse has ended and no application for review has been made; (B) an application for review has been made and the authority’s decision is confirmed, or the application is not proceeded with. (4) Section 49 does not apply to a cancellation under subsection (3). 56AG Procedure if licensee is excluded company (1) This section applies if the authority considers that a company that is a licensee is an excluded company. (2) The authority must give the company a written notice stating the following— (a) particulars identifying the individual (the relevant individual) who is a director or secretary of, or an influential person for, the company and who is an excluded individual for a relevant event; (b) particulars identifying the relevant event; (c) within 28 days after the authority gives the company the written notice, the relevant individual must— (i) stop being a director, secretary or influential person; or (ii) if the individual is eligible to do so but has not already done so, apply to the authority to be categorised as a permitted individual for the relevant event; (d) the circumstances, stated in subsections (3), (4) and (5), in which the authority must cancel the company’s licence. (3) The authority must cancel the company’s licence by written notice given to the company if, within the 28 days mentioned in subsection (2)(c), the relevant individual— (a) does not stop being a director or secretary of, or an influential person for, the company; and (b) if the relevant individual is eligible to do so but has not already done so, does not apply to be categorised as a permitted individual for the relevant event. (4) The authority must also cancel the company’s licence by written notice given to the company if all of the following apply— -- 6 of 29 -- QR218-08 / Page 7 of 29 (a) the relevant individual has already applied to be categorised as a permitted individual for the relevant event, or the relevant individual applies for the categorisation within the 28 days mentioned in subsection (2)(c); (b) the authority refuses the application and the relevant individual does not stop being a director, secretary or influential person; (c) either— (i) the period for applying for a review of the decision to refuse has ended and no application for review has been made; or (ii) an application for review has been made and the authority’s decision is confirmed, or the application is not proceeded with. (5) The authority must also cancel the company’s licence by written notice given to the company if the relevant individual is not eligible to apply to the authority to be categorised as a permitted individual for the relevant event and the relevant individual does not, within the 28 days mentioned in subsection (2)(c), stop being a director, secretary or influential person. (6) Section 49 does not apply to a cancellation under subsection (3). 56AH Review by tribunal of authority’s opinion (1) This section applies if the authority considers under section 56AF or 56AG (the relevant section) that a person is an excluded individual or excluded company, or that an individual is still a director or secretary of, or an influential person for, a company. (2) If a person applies for a review of the authority’s decision, the application for review does not affect anything already done or in force under the relevant section, but periods of time mentioned in the relevant section are taken to stop running until the review is finished. 6. In summary, by section 56AC of the QBSA Act, if a company for the benefit of a creditor has a provisional liquidator, liquidator, administrator or controller appointed, or is wound up or is ordered to be wound up and five (5) years have not elapsed since the event mentioned, an individual who was within the period of one (1) year immediately before the happening of the event, a director or secretary of, or an influential person for the company is an excluded individual for the relevant company event. By section 56AF of the QBSA Act, if the Authority considers an individual is an excluded individual for a relevant event the Authority must give the individual the notice required under that section. The individual then has a period of 28 days within which to make an application to be categorised as a permitted individual otherwise their license will be cancelled. The application to become a permitted individual is made in accordance with section 56AD of the QBSA Act. In accordance with subsection 56AD (3) of the QBSA Act the application must include the reasons why the Authority should categorise the individual as a permitted individual for the relevant event. By subsection 56AD (8) of the QBSA Act the Authority may categorise the individual as a permitted individual for the relevant event only if the Authority is satisfied, on the basis of the application, that the individual took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of the relevant event. The Authority must take into account the matters set out in subsection 56AD (8A) of the QBSA Act 1991 in deciding whether an individual took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of a relevant event. Though, in accordance with subsection -- 7 of 29 -- QR218-08 / Page 8 of 29 56 (8B), the Authority may have regard to other matters for deciding whether an individual took all reasonable steps. If an individual is categorised as a permitted individual for a relevant event, the individual is taken not be an excluded individual for the relevant event in accordance with subsection 56AD (9). 7. There have been a number of decisions in the Commercial and Consumer Tribunal which deal with applications to become permitted individuals. Both parties to this application made submissions in regard to relevant decisions which may assist the Tribunal assist in the interpretation of the provisions. The Applicant cited the decision of Member Morzone in Steel B.L. v Queensland Building Services Authority [2005] 144 at para 11 as follows:- “These provisions have been recently considered by the Commercial & Consumer Tribunal in Delonga v Queensland Building Services Authority. In that case Chairperson Schafer set out the principles to be applied in the review of such a decision which can be summarised as follows:- (a) the authority possess a discretion to categorise an excluded individual as a permitted individual once the authority is satisfied the individual took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of the relevant event. (b) The test of reasonableness in Section 56AD(8) of the Queensland Building Services Authority Act is an objective test to be applied having regard to the actual circumstances of the applicant. (c) The applicant bears the onus of satisfying the test. (d) The test does not relate to the taking of reasonable steps to avoid the happening of the relevant event itself but is wider. (e) What will amount to reasonable steps involves the investigation of the nature of the harm, the foreseeablity and degree of risk of its happening and the measures reasonably available for preventing or avoiding it.” 8. The Applicants submissions note that the individual in the Steel case had followed advice from his accountant to join a group who encouraged challenging the legislative basis for the imposition of tax. As a result of which he did not pay tax. The member is said to have relevantly stated “It would be highly unusual for a lay person to seek a second opinion of professional advice from an accountant in relation to tax liability.” The submissions seek to distinguish this matter from those in the decision of Hopkins v QBSA [2004] QCCTB 142, another decision where the Australian Taxation Office was the major creditor, on the basis that in that case there was evidence of outstanding liabilities to the ATO over a period of time (i.e. not a one off adverse assessment). 9. The Applicants submissions also cited the second reading speech of the Minister, the Honourable J.C. Spence when Part 3A was enacted, stating that, the object of Part 3A was to remove individuals from the building industry that are unscrupulous and/or incapable of managing their finances. It was submitted that, the “evil” that the part of the Act was intended to aim to prevent is “shonks”. Or perhaps to use another colloquial term “rogue builders”, those who mismanage companies, those involved with failed companies or enterprises (as a result of mismanagement) not, it is submitted those who follow professional advice and through no fault of their own face a “financial calamity”. -- 8 of 29 -- QR218-08 / Page 9 of 29 10. The Respondents submission also cited the second reading speech highlighting that “this is intended to mean that the relevant event was entirely outside the responsibility of the individual concerned, examples might be that a spouse has absconded with the individuals assets, or that a financial calamity was due to a natural disaster against which it is impossible to insure”. 11. In regard to the cases the Respondent made the following relevant submissions. Section 56AD(8) involves a two stage process as identified and accepted in the matter of Hyde v Queensland Building Services Authority [2003] QBT Q72-02:- (a) the Tribunal must first be satisfied on all the evidence placed before it that the applicant has taken all reasonable steps to avoid the coming into existence of the circumstances that resulted in the relevant event. (b) if that element is satisfied, then the Tribunal must consider whether the discretion to classify the person as a permitted individual should be exercised. In Hyde the Tribunal also found that:- (c) all reasonable steps does not mean all possible steps; (d) the relevant steps are those taken to avoid the coming into existence of the circumstances that resulted in the relevant event not the relevant event itself; (e) the wider enquiry may include the manner in which the Applicant conducted the business, In confirming the Authority’s decision to refuse to categorise the Applicant as a permitted individual in Cats v Queensland Building Services Authority [2008] QCCTHB 22, Member Butler AM SC, stated the following; “It should be stressed that the Tribunal should be satisfied that all, not some, reasonable steps have been taken by the Applicant. In Rich v State of Queensland & ors; Samin v State of Queensland & ors McPherson JA said: “What amounts to reasonable steps involves investigation of the nature of the harm, the foreseeability and degree of risk of its happening and the measures reasonably available for preventing or averting it””. In the matter of Dacey v Queensland Building Services Authority [2009] CCT QR206- 08, Member Geraghty referred to the lack of documentary evidence provided by Mr Dacey and stated that: “The applicant bears the onus of proof of establishing that he took all reasonable steps. In my opinion overall he does not meet this onus. The lack of documentary corroboration without any explanation puts this case in the same category as that of Hopkins v Queensland Building Services Authority [2004] QCCTB 142 .. the lack of documentary evidence and a reasonable explanation for that lack invites the inference that if those documents were produced they would not be helpful to the applicant’s case; or that they do not exist which would indicate section 56AD(8A) of the QBSA Act was not complied with and I can therefore have regard to that in determining whether the applicant took all reasonable steps.” In the matter of Dyson v Queensland Building Services Authority [2009] CCT QR08407, Member Lohrisch clearly indicated that: -- 9 of 29 -- QR218-08 / Page 10 of 29 “It is to be remembered that the onus rests with the applicant to prove that the applicant had taken all (and not some) reasonable steps in terms of section 56AD(8) of the QBSA Act. If the applicant happens to fall short of discharging that onus because of either or both, lack of documentation or failure in recollection then simply the applicant fails in this application.” In the matter of Hyndman v Queensland Building Services Authority [2009] QCCTB 240, in reference to making appropriate provision for Commonwealth and State taxation debts (section 56AD(8A(f) QBSA Act), Member Lohrisch stated that: “In my view the reference in section 56AD (8A) (f) to making ‘appropriate provision’ for Commonwealth and State taxation debts is to be given its ordinary meaning, rather than being a technical reference to such terminology as it is used on an entity’s accounts with a view to determining, in an historical context, what was that entity’s real net profit or loss for a period. In other word, what is required is that some form of priority being given tax debts by an entity, whether that be by setting aside a fund or an appropriate amount in cash flow arrangements, which will enable the settling of Commonwealth and State taxes when same fall due. To fall into arrears in respect of taxes, as happened in this instance on two occasions, is not in my view, making appropriate provision for Commonwealth and State tax debts pursuant to the relevant sub-section”. In the matter of Eliaba v Queensland Building Services Authority [2009] CCT QR035- 09, in reference to making appropriate provision for Commonwealth and state taxation debts (section 56AD(8A) (f) (QBSA Act), Chairperson Ms Schaefer found that there was no evidence of any negotiating by or attempted negotiations by the Applicant with the ATO for the company’s tax liability and that in the circumstances, the tribunal was satisfied that the applicant failed to take all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of the relevant event. 12. The question of what test applies in respect of “reasonable steps“ has also been considered in the decision of Mr Coyne in Parkes v Queensland Building Services Authority [2008] CCT QR118-05 where he stated at para 36: “The test for reasonableness in S56AD(8) of the Act is an objective one, to be applied with due regard being given to the applicant’s actual circumstances, such as their actual knowledge and experience.” 13. The Tribunal notes in the decision of Steel B.L. v Queensland Building Services Authority [2005] QCCTB 147 Member Hodge stated at para 15: “Whilst the veracity of the type of advice has been rightly criticised by the courts as being “groundless”, manifestly untenable” “confused”, ”nonsense” “and” an “abuse of process”. The lay applicant was not aware of this judicial criticism. He had no tertiary qualifications which would have equipped himself with the capacity to challenge the advice. Consequently, he faithfully accepted the advice of his accountant as being professional and competent, This conduct was not demonstrably reckless or malicious. -- 10 of 29 -- QR218-08 / Page 11 of 29 THE EVIDENCE 14. Mr Armstrong provided several statements in support of his application, in his statement of 9 February 2009 he described his background as follows: “I came to this business after 25 years in administration in insurance, computer management, manufacturing and banking. This was proceeded by a trade background as an electrician followed by obtaining a Bachelor of Commerce degree from the University of New South Wales.” 15. He further stated that the relevant event was the “appointment of a liquidator to the company Dual (Qld) Pty Ltd ACN 065 261 010 on 8 May 2008 and that the cause of the event was a Commonwealth taxation liability for the company. That the company’s taxation liability arose as a consequence of professional accounting advice received by the company in 1999 from the Harts Accounting Group. This was provided at a seminar on the Gold Coast on wealth creation for retirement attended by several hundred people. The seminar was presented by the then principal of Harts, Steven Irvine Hart. The arrangement was presented as a good investment that was legal and an appropriate retirement strategy. The taxation liability arose from tax returns lodged for the periods 1999 and 2000. The taxation return for the year ended 30 June 1999 was lodged, the exact date of lodgement is unknown as we have no record of that date.” In a further statement dated 4 March 2010 Mr Armstrong provided a copy of a 1999 Income Tax return for the Company which was date stamped 11 November 2003. 16. Mr Armstrong further states that, it was not until almost 4 years after following the advice provided by the Harts Accounting Group that advice was received from the Australian Taxation Office (“ATO”) that it was ruling against the arrangement entered into. Immediate steps were taken in conjunction with our financial and taxation advisers to seek legal advice as to what steps were necessary to resolve that matter. Upon receiving the adverse taxation assessment and determination in March 2004 I caused advice to be received from the Company’s then accountants and taxation advisers Central 1 (Brisbane) Pty Ltd that an objection be lodged against the assessment as the company did not incur the deduction as claimed by the ATO. A Barrister specialising in these matters was engaged, namely Mr A Powrie based in the ACT who advised at meetings verbally that our position was correct. Correspondence was entered into between the ATO and the company’s accountants after the adverse assessment was made, to objecting to the assessment as well as the interest on the penalty applied. Objections were made in June 2004 to the adverse determination by the ATO. The appeal to the AAT was lodged on advice from the Company’s then Accountants and legal advisers. An adverse finding was made in the AAT disallowing the appeal against the assessment in November 2007. Advice was received from the Company’s legal adviser that an appeal should be made against the decision however the Company took the decision that it was uneconomic to pursue the Appeal. Included in the documentation with the application to the QBSA to be a permitted individual is an email from the applicants legal adviser dated 15 November 2006 stating that he considered the decision was wrong and appealable and detailing significant further costs of the appeal involved. The company was unable to meet the liability to the ATO. The liability was not thought to be a liability at all. The company believed at all times that it was not liable to pay the liability by virtue of the professional advice it had received. In consultation with our accountants and -- 11 of 29 -- QR218-08 / Page 12 of 29 given the significant monies that had already been expended in appealing the assessment by the ATO it was decided to let the matter take its course, There was no money to pay the liability and it was uneconomic to pursue the matter further. It is important to note that all creditors (except the ATO) were paid in full. There was no effect on the building industry in that regard. By that statement I mean there were no sub-contractors or other persons engaged in the building industry who are owed money by that company as is often the case where a company with some relationship in the building industry goes into liquidation. The event arose and was caused by relying on professional advice. There were no other relevant factors which would lead to the conclusion that I should not be a permitted individual. So far as I am aware namely:- (a) no suggestion that the company did not keep proper books of account or financial records, in that regard I confirm that the financial management practices of the current company that trades as Airwave Airconditioning Pty Ltd utilises were utilised by me in the financial management of the Company Dual (Qld) Pty Ltd; (b) The Company and myself assured that appropriate financial and legal advice was obtained before entering into financial and business arrangements or conduct of the business. Unfortunately the financial advice accepted from the Harts Accounting Group has led to the circumstances or happening of the relevant event; (c) There is no existence of fraud or theft; (d) No guarantees were provided by the Company or Directors of the Company that have led to the event; (e) There was no suggestion that the Company or myself did not ensure that appropriate credit management arrangements were put in place for amounts owing and reasonable steps taken for recovery of the amounts. One cannot provide or account for a liability that is not known to be owed. (f) Other than the ATO liability which led to the happening of the event the Company and myself ensured that the Company made adequate provision for Commonwealth and/or State taxation debt. 17. Mr Armstrong provided a further statement to the Tribunal dated 15 January 2010 which relevantly clarified some matters from his earlier statement as follows; I was spoken to at the seminar and at a meeting some time after the seminar by accountants engaged by the Harts Group. Those accountants were Ross McSwain, who is my current accountant and at that time was an employee of the Harts Accounting group, and Brian Bower, another employee I believe. Brian Bower was at that time working with the Harts Accounting Group, he had been my accountant at the firm of Roberts & Morrow. At the time of the seminar I was still a client of Roberts & Morrow who were in New South Wales. I did not discuss with Roberts & Morrow the advice I received from the Harts Accounting Group as I trusted Brian Bower and went with Harts with whom he was working. As far as I was aware it was a legitimate investment strategy based on the advice that I was given. I understand there are a number of people who followed the advice and there were a lot of people who attended that seminar. I did not simply blindly follow the advice after attending I had a meeting with the accountants, Brian Bower and Ross McSwain and proceeded with the strategy after having discussed the matter with them. I understood it to be a tax effective investment strategy, as part of retirement saving. I was advised that other clients had sought independent legal advice and on that advice had entered the arrangement. If I had thought there was anything wrong with the advice that I was given or the strategy I would not have proceeded with it. Unfortunately, I did proceed -- 12 of 29 -- QR218-08 / Page 13 of 29 with it and as a consequence of doing so and then the ATO issuing an adverse assessment and the Administrative Appeals Tribunal deciding against our appeal that has lead the company being placed in liquidation. From my recollection the company ceased to trade in 2005. All creditors excluding the ATO which was a disputed debt were paid. In relation to the audit and investigation by the ATO I co-operated as best I could with the ATO. There was limited paperwork available to me, what I had provided, I confirm my accountant Ross McSwain advised me to appoint Alan Powrie (Barrister) of Powrie & Co to prepare objections to the ATO and ultimately also conducted the appeal in the Administrative Appeals Tribunal. 18. Mr Armstrong provided oral evidence at the hearing and relevantly stated that: He could not recall receiving any documentation whatsoever (about the strategy) That the strategy was a good retirement strategy and the mathematics were explained to him by Mr McSwain, that he had to put in funds over 10 years and it was a positive investment. He did not make further enquiries given the level of professional advice The ATO provided the decision many years later Having been provided with a copy of the 1999 year tax return he agreed that it was lodged in 2003 and that it was not many years after lodgement of the return. The basis of the decision not to appeal the AAT decision was that substantial funds had already been spent appealing the ATO decision and the opinion was that a further $30,000 could be spent. I was very pessimistic that appeal would succeed. Up to then I had been given to believe we had good prospects of succeeding with AAT. He agreed that the reason the ATO objection and AAT appeal failed was the lack of documentation. But stated that what documentation he had he provided. The company kept appropriate records The creditors of Dual was only the ATO The company paid all creditors apart from the ATO but he had not brought financial statements. Dual ceased trading in 2005 licence ended October 2005 There were no funds left after paying creditors There were no payments to shareholders There was no lending of funds to EYB Management Pty Ltd (an associated company) Dual and EYB Management Pty Ltd carried on the same business The companies shared tools vehicles and all employees were transferred Dual was the operating entity and all assets were owned by Airwave Mechanical services Pty Ltd When asked did he know Dual was going under he stated: -- 13 of 29 -- QR218-08 / Page 14 of 29 It was the end of 30 year marriage, divorce had only just come through, decided to make clean break, wanted clean slate, personally started EYB up in early part of year to take on air-conditioning side. From the time of the AAT decision Mr Powrie advised what other steps to take to get rid of the ATO debt. He did not think of putting his own funds into the company He did not think the company could trade out of the debt. ATO debt was a figure we would all like to see in bank a small company could not trade. He acknowledged that the company’s turnover was greater than one million up to two million dollars. There was no consideration of a payment plan to pay the ATO debt. There were limited conversations with the ATO, no suggestion of any arrangement being considered, ATO not interested in any arrangement. There was no written advice in regard to dealing with the ATO. There had been no contact with the liquidator or correspondence from the liquidator. He had not been involved in tax effective investments before When asked if it was reasonable to get an advanced ruling he stated: In hindsight it was reasonable to get advice There were no measures in place to ensure that the company’s tax returns were lodged on time He had accountants who were supposed to do this job The only circumstance that led company to liquidation was the ATO debt but he had no documentary proof of that. He agreed that the company had funds of about $350,000 available at the end of the 1999 financial year, as the funds for the investment strategy were by way of loan. There was a contribution of $60,000 paid to Harts by the company. He stated that the interest on the loan was $3,000 per quarter and he had paid it for a year and half that he had stopped in 2001. Part of the reason for this was the effect of the introduction of the GST on the building industry. When he received the amended assessment with penalty and interest he had 3 telephone calls with one person from the ATO. He understood the ATO investigation went to New Zealand He understood that if there was no appeal from the AAT the ATO would wind up the company He had not taken into consideration the implication for his licence. When shown a reference in Mr McSwain's statement about ceasing to pay interest he stated: -- 14 of 29 -- QR218-08 / Page 15 of 29 Told arrangements were up in the air. I was of the opinion it was going to go one way or the other not to do anything until it was finalised, until scheme was knocked on the head. He did not take any steps. He expected to be informed by Mr McSwain. The accountant had not advised him about penalty tax and interest. 19. Mr Ross McSwain also provided statements to the Tribunal the original one was dated 9 February 2009, which relevantly stated: He was an accountant of the firm Central 1 (Brisbane) Pty Ltd. I confirm I understand that Harts Accounting Group advised the applicant as to the superannuation arrangements entered into which has resulted in the adverse assessment by the ATO and further that Harts Accounting Group were promoting the strategy as a legal and appropriate retirement strategy. I was also the accountant for the company, Dual (Qld) Pty Ltd and can also confirm that the company from my experience with preparing its financial statements had appropriate systems in place for financial recording, management and reporting. As to the 1999 financial year tax returns I cannot comment as to the date that the return was lodged as I did not prepare the return. The 2000 return was lodged on or about 30 March 2003 to the best of my knowledge. In relation to the adverse assessments made by the ATO in relation to the 1999 and 2000 tax returns I confirm that I made various representations to the ATO and objections on behalf of the applicant and the taxpayer company. I consider that the assessment made by the ATO were incorrect and the barrister engaged in the Administrative Appeals Tribunal proceeding provided advice to the applicant and the company that in his view he considered the decision by the AAT was wrong and was appealable however it was simply not cost effective for the applicant to continue to pursue the matter. The matter was pursued as far as my client could go because of the significant financial cost which would have been prohibited further legal proceedings. 20. Mr McSwain provided a further statement to the Tribunal dated 18 January 2010 which relevantly stated: I was employed as an accountant by the Harts Accounting Group. I was present at the relevant seminar and spoke to the applicant both at the seminar and at a meeting with the applicant sometime afterwards. I recall there were conference papers and a conference booklet that may have been given to those attending the seminar I don’t have in my possession a copy of those documents now. I along with Brian Bower, who had been the applicants accountant as a member of the firm Roberts & Morrow accountants spoke with the applicant at a meeting some time after the seminar and discussed the investment strategy which the applicant ultimately proceeded with. I was aware that Harts Accounting Group had clients who had received legal advice from experts interstate that the arrangement was legal. I believe that the superannuation arrangement was a legitimate investment strategy and was at the time appropriate for the applicant to enter. The ATO and the Administrative Appeals Tribunal obviously ultimately did not agree with that view. As far as I can recall there were no letters of advice or documents prepared by the Harts Accounting Group other than the paperwork that would have been signed to record the transactions. The investment strategy involved:- -- 15 of 29 -- QR218-08 / Page 16 of 29 (a) funds being borrowed by a person (in this case the applicant) from a lender United Overseas Credit Limited; (b) the borrowed funds were then lent to Airwave Airconditioning Pty Ltd a company now known as Dual (Qld) Pty ltd; (c) Dual paid a management fee to Airwave Airconditioning (Gold Coast) Pty Ltd. Gold Coast made a contribution to a superannuation fund which purchased an insurance bond; (d) interest was payable on the loan which initially was paid until on my advice I advised Mr Armstrong from continuing with the payments once we became aware that the ATO were investigating these types of investment strategies. That advice was given because I considered the money would simply be wasted if there was something wrong with the arrangement; (e) The transaction involved a series of inter company transfers that were all finalised on the day of settlement. In addition fees were paid to United Overseas Credit Ltd for arranging the loan (loan application, power of attorney, and pro forma trust deed and rules of the fund are attached); (f) The Super fund was National Employees Welfare Fund based in New Zealand; (g) Ultimately tax would have been paid, at the maturity of the superannuation bond. The investment strategy was effectively an arrangement where payment of the tax would be legally deferred. In relation to the financial position of the company between the period 2006 and 2008 to the best of my recollection the company ceased to trade in mid 2005. To my knowledge there were sufficient funds in the company to pay all trade creditors. The company disputed the ATO debt which was not paid. In relation to the steps taken between the advice received from Alan Powrie, Barrister (being the email referred to in application to review the BSA’s decision) and the company being placed in liquidation I confirm that I discussed the matter with the applicant. A commercial decision was made not to pursue the appeal. Whilst the legal advice may have suggested there were good grounds to appeal the decision and I disagree with the decision of the ATO and the AAT there was no guarantee of success, as there is no guarantee of success with any court proceeding. In relation to the ATO audit of the company and investigation in relation to the superannuation arrangement the applicant as far as I am aware from my involvement in the matter co-operated as best he could, as I did. There was limited paperwork available. 21. Mr McSwain also provided oral evidence at the hearing and relevantly stated that: He was working for Harts at the seminar Mr Armstrong had attended and he had a further meeting with Mr Armstrong in late May early June talking about the strategy. He had recommended it was a suitable strategy for him to be part of. He had been Dual (Qld) Pty Ltd accountant from 2000 until it went into liquidation -- 16 of 29 -- QR218-08 / Page 17 of 29 He had not prepared the company’s 98-99 return Mr Brian Bowers did and he was employed by Central 1. He couldn’t confirm when it was lodged but it was definitely late. He did not advise Mr Armstrong that he could get an advanced ruling. It was not only something Mr Armstrong was involved in there was about 100 others and they had changed the law to clarify a disputed point. That it was hard to find documents and he did not know why they were not provided to the ATO. He had not run the AAT case though he had given evidence. The company kept proper records. He had discussed with Mr Armstrong how to pay the ATO and had advised him against it. The ATO were not particularly amenable to negotiation. I told him that consequences of not paying could be the ATO winding up the company. He believed that he advised Mr Armstrong in 2001 that ATO were investigating and that he had extensive discussions which he can’t recall. There was no specific advice about what steps to put in place if the investment strategy fell through. He had not told Mr Armstrong about penalty 21. Ms Natasha Dennis, a senior compliance office with the Queensland Building Services Authority, provided the Tribunal with several statements, the first being dated 26 February 2009which summed up the submissions of the respondent as follows: I made that decision to refuse to categorise Andrew Armstrong (the applicant) as a permitted individual for the relevant company events. The applicant holds a licence in the category of refrigeration, air conditioning and mechanical services including unlimited design and trades as Airwave Air Conditioning Pty Ltd. The applicant’s licence is 78644. The applicant is also a nominee and director for a company which also holds a licence with the BSA, EYB Management Pty Ltd. The licence number of EYB Management Pty Ltd is 1055082. On 2 June 2008, I considered the applicants application to be categorised as a permitted individual and recommend that the application be refused. In determining whether to categorise the applicant as a permitted individual, I considered section 56AD(8) of the Qld Building Services Authority Act 1991 the (QBSA Act). In doing so I considered whether the applicant took all reasonable -- 17 of 29 -- QR218-08 / Page 18 of 29 steps to avoid the coming into existence of the circumstances that resulted in the relevant event. I identified the following deficiencies in the applicant’s application: the applicant did not provide any details or evidence of advice received from Harts Accounting Group; the applicant did not provide any details of when the 1999 and 2000 tax returns were lodged with the ATO; the applicant did not provide any evidence of advice sought or received once the ATO’s ruling was received in March 2004 disallowing his claim; the applicant did not provide any detail of any appeal lodged against the AAT decision made on 3 November 2006, which confirms the ATO’s ruling; the applicant did not supply any details of steps taken or advice received by him between the AAT’s decision in November 2006 and the company being placed into liquidation in May 2008; and the applicant did not provide any evidence of any professional advice sought or received, for example, financial advice or legal advice. Based on the evidence provided by the applicant in this application to be categorised as a permitted individual, I determine that the applicants application be refused as there was insufficient information to confirm that he took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the relevant events. 22. The Applicant provided a copy of the reasons for decision in the appeal from the Australian Taxation Office amended assessment with his application to be categorised as a permitted individual. In his decision, Mr J.W Constance, Senior Member in The Taxpayer v Commissioner of Taxation [2006] AAT 941 makes the following relevant comments and findings: At para 1, In assessing the income tax liability of the taxpayer, Airwave Airconditioning Pty Ltd for the 1998/99 financial year the Commissioner of Taxation disallowed claimed deductions of $510,000 for management fees and $792 for interest. In respect of the year 1999/2000 a claim of $26,503 for interest was disallowed. At para 6, The taxpayer has argued that the $510,000 management fee is properly assessable as income of a related company to which it is alleged the fee was paid. As counsel for the Commissioner has pointed out, the taxation affairs of a related entity are not the subject of these proceedings. The relevant issue for determination is whether the taxpayer has discharged the burden of proof to establish that the claimed outgoings are allowable deductions under section 8-1 of the Income Tax Assessment Act 1997 (Cth). At para 8, The evidence put before me by the taxpayer was seriously deficient and caused me to have serious concerns as to the veracity of the witnesses for the -- 18 of 29 -- QR218-08 / Page 19 of 29 taxpayer. I am not satisfied that the claimed outgoings of management fees and interest are allowable deductions. At para 10, Mr McSwain gave evidence that the company paid a management fee to the related company “for a raft, or a bundle of services”. He described these services as being management services provided by Mr Armstrong as an employee of the related company. In the same year the related company paid $500,000 to United Overseas Credit Limited. The capacity of the related company to make the payment derived from the payment of the management fee by the taxpayer. At para 12, Mr McSwain also gave evidence that the funds used by the taxpayer to pay the management fee were provided to the taxpayer by Mr Armstrong. The funds were borrowed by Mr Armstrong from the United Overseas Credit Limited and were provided to him by way of promissory note. The funds were then transferred by journal entry from the taxpayer to the related company. At para 13, Mr Armstrong confirmed that he is the sole director of the taxpayer and the related company and has held these positions at all relevant times. At para 14, Mr Armstrong agreed that he had paid approximately $500,000 to the taxpayer, having borrowed this sum from the United Overseas Credit Limited. The loan was for a fixed term with interest only payments quarterly in arrears, he said that he did not recall how the funds were received by him or how they were paid by him to the taxpayer. Nor did he recall whether he had a bank account into which the funds from the promissory note were deposited at any time. Mr Armstrong did not recall whether he had retained a copy of the promissory note. The taxpayer did not provide any documentary evidence of the loan to Mr Armstrong and/or the transfer of funds from Mr Armstrong to the taxpayer. Mr Armstrong also agreed that there was no formal documentation of a management agreement between the taxpayer and the related company. At para 16, Mr Armstrong said that he only learned that the loan had been cancelled whilst giving evidence during the hearing. He also said that since 27 April 2000 he had not paid interest on the loan. At para 18, Mr Armstrong gave evidence that he believed the $510,000 management fee paid to the related company by the taxpayer comprised two amounts. These were $10,000 for wages (which was paid by the related company to him) and the remaining $500,000 which was used by the related company to make the $500,000 payment for the insurance policy. Mr McSwain said that Mr Armstrong was paid $10,000 by way of wages for one month’s employment, although he later changed his evidence to indicate that the $10,000 related to all expenses associated with the management services. If I accept the former version of events put forward on behalf of the taxpayer, it would appear that Mr Armstrong was paid $10,000 for employment during one month or less and his management services for the same period were paid for by the taxpayer in the sum of $510,000. At 23, The taxpayer did not provide any evidence of the services for which it claimed to have paid $510,000 other than the very general description of management services provided by Mr Armstrong. In view of the onus being on the taxpayer, I expected that Mr Armstrong would have provided considerable detail as to the work it is claimed he undertook. Mr Armstrong was the sole director of -- 19 of 29 -- QR218-08 / Page 20 of 29 each of the subject companies at the time the fee was said to have been paid. It is reasonable to expect, in those circumstances, that evidence would be available as to precisely what was done by Mr Armstrong in return for the payment by the taxpayer to the related company. I also regard it of considerable significance in reaching this decision that there was no documentation produced relating to the claimed management agreement. At para 24, I have taken into account also the written advice from Mr Armstrong to the Australian Taxation Office of 10 November 2003 that the related company, which was said to have been providing the services to the taxpayer, did not trade during the relevant period. Although Mr McSwain said he had prepared financial accounts for the related company for this period they were not provided to the Tribunal. Again, I would have expected this to have occurred in view of the advice of 10 November 2003. At 25, On the other hand, the evidence strongly suggest that the payment of $510,000 by the taxpayer was simply a journal entry to provide funds to the related company to enter into some form of superannuation arrangement in respect of which ultimately no deduction was claimed. This was on the advice of the legal representatives of the related company. It is not necessary that I make a positive finding in this regard. I simply note that the evidence in relation to the transaction raises considerable doubt in my mind as to the veracity of the claim that the payment was for a management fee. As I have said, Mr Armstrong did not provide the evidence one would expected he could, as to the services he was said to have provided. He was extremely vague regarding the transaction in which the money was advanced by him, then paid to the taxpayer and ultimately paid to the related company. He did acknowledge that the related company used the money for the purpose of purchasing a life policy on his life. At 26, The evidence on behalf of the applicant in relation to the claimed deduction for interest is equally unsatisfactory and I am not satisfied that the taxpayer has discharged the burden of showing that it meets any of the tests to entitle it to the deductions claimed. The letter of 16 May 2001 from United Overseas Credit Limited entitled “confirmation for Order to Purposes”, when compared with the statement of the interest payments of 31 December 2002 strongly suggests to me that this was not an arms length transaction. In any event, it appears that the interest payments were made by Mr Armstrong, and not the taxpayer. In addition, neither the interest payments made in the relevant financial amount to the deductions claimed. In light of the evidence that the loan had been cancelled for a number of years before Mr Armstrong became aware of this fact, together with Mr Armstrong’s failure to pay interest for a number of years without a satisfactory explanation, leaves me in doubt as to the true nature of this transaction and the interest for which the deduction is claimed. Again, the onus is on the taxpayer to show that the deductions claimed are lawful deductions I am not satisfied of this. 23. Mr Armstrong also provided copies of the submissions of the Applicant and submissions of the Applicant in reply prepared by Mr Alan Powrie in respect of the AAT application. While these submissions were of an extensive nature they were ultimately not found persuasive by the Administrative Appeals Tribunal. 24. Mr Armstrong provided a copy of the Australian Taxation Office statement of reasons for decision in respect of the objection to the amended assessments. The reasons relevantly disclose as follows: -- 20 of 29 -- QR218-08 / Page 21 of 29 A notice of intention to audit was sent to Airwave Airconditoining on 9 December 2002. This letter requested that the taxpayer provide information and documents listed in an attached schedule to the letter so that the ATO may review the deduction claimed. On 2 January 2003 Ross McSwain responded to the ATO letter advising given the time of year ‘they will not be in a position to respond further prior to 31 st January 2003’. On 19 August 2003 the ATO sent a further letter to Airwave Airconditioning. This letter requested a response to the questionnaire in the ATO letter dated 9 December 2002 and further documentation and financial statements. In this letter it was indicated that on 16 April and 30 April 2003 further requests had been made, via the tax agent in regards to possible involvement in arrangements and to date a response has not been provided. On 7 October 2003 a notice pursuant to section 264 of the ITAA 1936 was sent to Mr Andrew Armstrong as the public officer of Airwave Airconditioning. On 10 November 2003 Andrew Armstrong as director of Airwave Airconditioning responded to the section 264 notice dated 7 October 2003 by provided the following documents Financial Accounts year ended 30 June 2000 Financial accounts year ended 2001 Financial accounts year ended 2002 General ledger year ended 30 June 2000 Undated letter from United Overseas Credit to Andrew Armstrong Confirmation for audit purposes dated 16 May 2001 United Overseas Credit Limited Statement dated 12/12/2002 European Grande Assurance letter dated 1 April 2003 United Overseas Credit Limited letter dated 9 April 2003 On 17 March 2004 a letter was sent to Airwave Airconditioning advising of adjustments that have been made to its taxable income for years ended 30 June 1999 and 30 June 2000. The letter explained that: The adjustments are based on the Commissioners position that you are not entitled to deductions for expenses claimed in relation to an Employee Welfare Fund (EWF) or Controlling Interest Superannuation Fund (CIS) arrangements. Based on the information provided by you and your agent it cannot be determined whether you entered into a EWF or a CIS. -- 21 of 29 -- QR218-08 / Page 22 of 29 By notice of assessment dated 24 March 2004, Airwave Airconditioning was assessed on an assessable income of $369,184 for the year ended 30 June 1999. The contribution of $510,000 was disallowed, as were interest expenses of $2,136. Penalty tax of $66,453.11 was imposed at 50% of the tax shortfall amount pursuant to section 226H of the ITAA 1936. Interest of $85,826.56 was imposed under section 170AA of the ITAA. By notice of assessment dated 24 March 2004, Airwave Airconditioning was assessed on an assessable income of $200,829 for the year ended 30 June 2000. Prior year losses of $178,829 were disallowed, and deductions for interest expenses of $22,550 were also disallowed. Penalty tax of $36,149.22 was imposed at 50% of the tax shortfall amount pursuant to section 226H of the ITAA 1936. Interest of $31,453.92 was imposed under section 170AA of the ITAA. An objection to the assessment for the years ended 30 June 1999 and 2000 was lodged on 18 June 2004. In the objection letter Airwave Airconditioning had stated that they had no knowledge of entering into any EWF or CIS during the relevant period. Airwave Airconditioning stated that during the relevant period, they had claimed as deduction expenditure incurred on the ‘MFI Investment’ and other payments associated with that investment. Airwave Air-conditioning stated that the decision to invest was taken after a ‘careful review of the relevant MFI investment information’. On 7 September 2004 further information was requested from Airwave Airconditioning: As to whether any or all of the following interest payments were claimed as income tax deductions and in which year the June 1999 interest payment was paid: 01/12/1999 PMT No 502412-Jun 99’ $2,136.00 12/12/1999 PMT No 502417- Sept 99 $7,500.00 28/01/2000 PMT No 502451- Dec 99’ $7,500.00 27/04/2000 PMT No 502496-March 2000 $7,500.00 To explain the nature and particulars of the ‘MFI Investment’ and provide any relevant documentation or information on the MFI investment and whether any amounts were claimed as income tax deductions in the 1999 and 2000 years. A letter was received from Airwave Conditioning’s solicitor Powrie & Co dated 19 October 2004 advising that they are seeking instructions concerning requested information. Despite reminders in writing and extension of times to supply the requested information until the end of January 2005 no further information has been provided by the taxpayer in relation to the interest expenses or ‘the MFI investment’ -- 22 of 29 -- QR218-08 / Page 23 of 29 Airwave Airconditioning has not furnished relevant documentation as evidence to confirm that it incurred expenditure claimed of $510,000 for purported management fees. It is considered that the management fee of $510,000 for the year ended 30 June 1999 is not deductible under section 8-1 of the ITAA 1997 because there is insufficient evidence that the expense has actually been incurred in earning its assessable income. It is considered that the interest expense of $2,136 for the year ended 30 June 1999 is not deductible under section 8-1 of the ITAA 1997 because there has been insufficient evidence provided in order to determine that the expense has been incurred in relation to earning its assessable income. It is considered that the interest expense of $22,500 for the year ended 30 June 2000 is not deductible under section 8-1 of the ITAA 1997 because there has been insufficient evidence provided in order to determine that the expense had been incurred in relation to earning its assessable income. A taxpayer who has a tax shortfall for a year of income may be liable to pay a penalty. Guidance is given by Taxation Ruling TR 94/4 as to the imposition of penalties for a tax shortfall. As stated at paragraph 7 of TR94/4: Recklessness is gross carelessness. A taxpayer will have behaved recklessly if the taxpayer’s conduct clearly shows disregard of, or indifference to, consequences that are foreseeable by a reasonable person as being a likely result of taxpayer’s actions. It is not necessary for a finding of recklessness that the taxpayer should have been acting dishonestly, nor that the taxpayer intended to bring about the consequences that his or her actions caused. The additional tax imposed under Part VII may be reduced in certain instances. Section 226Y of the ITAA provides where a taxpayer makes voluntary disclosure of information about the shortfall after notification of an audit which results in a saving of time or resources then the amount of the additional tax is reduced by 20%. There has been no such voluntary disclosure in this matter. Section 226Z provides that where a taxpayer makes a voluntary disclosure of information about a tax shortfall before being notified that an audit is to be carried out, then where the shortfall is at least $1,000 the additional tax is reduced by 80%. There has been no such disclosure in this instance. -- 23 of 29 -- QR218-08 / Page 24 of 29 On reviewing the facts of this case, it is considered that the deductions claimed for the years ending 30 June 1999 and 30 June 2000 were not allowable under section 8-1 of the ITAA 1997. It is considered that the taxpayer was reckless in claiming such deductions and there was a tax shortfall as a result of recklessness. The penalty of 50% applied to the amendment made to the years ended 30 June 1999 and 30 June 2000 shall not be remitted as the Commissioner of Taxation is not satisfied that there are grounds which would warrant such a remission in penalty. 25. The Applicant also provided copies of correspondence received by the Company from the Australian Taxation Office. One letter dated 25 November 2004 set out the arrangements which could be made for the payment of the disputed tax. These enabled the taxpayer to pay 50% of the disputed assessment and receive a reduction of the interests to be paid on the balance outstanding of 50% and also sought offers to settle by taxpayers. CONCLUSION 26. The Applicant, Mr Andrew Armstrong, on or about 4 June 1999 executed a series of documents to give effect to advice which was provided to him by the Harts Accounting Group in regard to a superannuation investment strategy. The Tribunal has not been provided with a copy of that advice and it has been said by the Applicant and his accountant, Mr McSwain that the advice was of an oral nature, though there may have been a brochure provided at the seminar held on the Gold Coast in May 1999. In terms of the documents evidencing the transaction the Tribunal has been provided copies of a loan application form headed United Overseas Credit Ltd in the amount of $500,000 with Mr Andrew Thomas Armstrong as the Applicant and a specific power of attorney with Andrew Thomas Armstrong as the appointor of Peggy Chan as attorney authorising the attorney to execute the letter of approval for the loan, the loan agreement, the promissory note and credit information authority and a non-complying superannuation plan trust deed. Relevantly here the Company with funds loaned to it by Mr Armstrong from the proceeds of the loan from United Overseas Credit Limited, is alleged to have paid a management fee to Airwave Airconditioning (Gold Coast) Pty Ltd in the amount of $510,000, which was claimed as a deduction in the Company’s 1998 -1999 Income Tax return. There was also a claim for interest on the loan made in the 1999 year as well a further claim for interest in the 1999-2000 Income Tax return. The Australian Taxation Office audited the company and as a result of that audit the deduction for the management fees and interest were disallowed and the Company was issued with amended assessments. Those amended assessments were not issued until 17 March 2004. The Company objected to those assessments which were disallowed by the Australian Taxation Office on 10 March 2005 and then appealed to the Administrative Appeals Tribunal. The Applicant and his accountant, Mr McSwain, claim the company ceased trading in mid 2005 and all creditors were paid apart from the Australian Taxation Office. The Administrative Appeals Tribunal affirmed the decision of the Commissioner of Taxation on 3 November 2006 and no further appeals were made. The Company had a liquidator appointed to it on 8 May 2008 on the application of the FCT. 27. As a result of the appointment of a liquidator to the Company the Applicant became an excluded individual in accordance section 56AC of the QBSA Act as he was a -- 24 of 29 -- QR218-08 / Page 25 of 29 director of the company at the time of its liquidation. The Applicant made application to be categorised as a permitted individual to the Respondent which application was refused. The Applicant is now seeking a review of that decision. The Tribunal may, in accordance with Section 56AD(8) of the QBSA Act, categorise the Applicant as a permitted individual if it is satisfied that he took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of the relevant event. The Applicant has submitted that the cause of the relevant event was the Commonwealth taxation liability for the Company which arose as a consequence of professional accounting advice received by the company in 1999 from Harts Accounting Group. The Respondent submits that based on the information provided by the Applicant, the Authority is unable to determine whether this was the only circumstance that led to the relevant event. The Tribunal notes that it has not been provided with any material in regard to the liquidation of the company and there is then no third party evidence as to the creditors who participated in the liquidation of the company. For the purpose of this application the Tribunal accepts the evidence of the Applicant and his accountant and will proceed on the basis that it was the unpaid liability owing to the Australian Taxation Office which resulted in the liquidation of the Company. 28. The Tribunal must now look at what steps the Applicant took to avoid the coming into existence of the unpaid liability to the Australian Taxation Office to determine if those steps were all the reasonable steps he could have taken. From the authorities he must have taken all, not some, reasonable steps and the test is an objective one. In particular having regard to the Applicants actual circumstances such as their actual knowledge and experience. The Tribunal must have regard to action taken by the Applicant in regard to the matters set out in section 56AD(8A) of the QBSA Act. The Applicant submits that following the advice of professionals, including the Applicant’s accountant, satisfied the requirements that the Applicant took all reasonable steps. In regard to the advice sought, the Applicant’s submission nominates the following advice: a. Professional accounting advice from Harts Accounting Group. b. Further advice in regard to the Applicant’s particular circumstances from Mr Ross McSwain and Mr Brian Bower’ c. Advice from Mr McSwain and Mr Alan Powrie following the adverse ATO decisions in regard to objecting to the decision’ d. Advice form Mr Powrie in relation to the AAT decision, this refers to an email stating that there were good prospects on appeal with costs in order of $25,000 to $30,000. e. Further professional advice in relation to what to do regarding the adverse decision. There are a number of other matters which regard must be had under 56AD(8A) and in respect of these the Applicant has asserted that that these matters are not in issue in respect of this application. 29. The Respondent has submitted that the onus is on the Applicant under section 56AD(8A) to show that he took all reasonable steps having regard to the matters set out in that section and that there has been no documentary evidence produced by the -- 25 of 29 -- QR218-08 / Page 26 of 29 Applicant to prove that he took all reasonable steps in regard to any of the matters set out in the section. This lack of documentation goes to the heart of this application. There is no evidence of the advice that was given by the Harts Accounting Group to justify the Company entering an arrangement whereby it was to claim a $510,000 income tax deduction. This goes to the question of whether or not that advice was “appropriate financial or legal advice” in accordance with section 56AD(8A)(b). The fact that it may have been professional accounting advice is not sufficient, the Act requires that it be appropriate. For it to be appropriate, regard would need to be had to such matters as the legal authority on which the advice was based in terms of compliance with the taxation laws, whether the advice was tailored to the circumstances of the Company or simply generic and the documentation of the proposed arrangements. The Applicant cannot rely on the fact that the advice was given by an accountant as the Applicant in the Steel case did. That Applicant was considered to be a layperson and the fact that he had no tertiary qualifications was noted. Mr Armstrong is, on his own admission, someone with extensive business experience who has a Commerce degree. It would be expected that someone of his background would seek further advice when he was contemplating entering such a significant arrangement which could potentially have adverse consequences as has occurred here in terms of the amended assessments of the Australian Taxation Office and the penalty and interest which was placed on those assessments. The Tribunal finds that someone of the applicant’s background should have been well aware of the potential consequences of entering an arrangement which the Australian Taxation Office may later determine is not allowable in terms of the potential for interest charges and penalties. In particular the Tribunal has regard to the fact that the Company did not seek a second opinion in regard to the advice from its own accountants, Roberts & Morrow. The applicant has indicated that he relied on Mr Bowers who had been an accountant with Roberts & Morrow and someone he trusted. Mr Bowers was not at that time independent of the Harts Group. The Applicant has continually referred to a retirement investment strategy and how he was shown the mechanisms of it and how it would operate. The fact is that both the Australian Taxation Office and the Administrative Appeals Tribunal were not satisfied that a management fee claimed by the Company as part of that retirement investment strategy was incurred by the company because there was no documentation to support the agreement to provide the management services and it was not the so- called retirement investment strategy itself which ultimately was disallowed. The Tribunal notes that Member Constance in the Administrative Appeals Tribunal decision stated that “It is reasonable to expect, in those circumstances, that evidence would be available as to precisely what was done by Mr Armstrong in return for the payment by the taxpayer to the related company”. The Tribunal considers that having regard to the size of the deduction claimed, $510,000, it was a reasonable step that the Company had a written agreement to support that management fee. The Applicant did not obtain such an agreement and neither could the Applicant or Mr McSwain explain at the Administrative Appeals Tribunal the management services to be provided. The taking of advice and objecting and appealing an adverse decision of the Australian Taxation Office would be considered reasonable steps in relation to a matter such as this. But, If the position of the taxpayer Company was not tenable from the start and the Tribunal finds that it was not in this case due to the lack of documentary evidence and the best course of action would have been a voluntary disclosure as soon as the Company became aware that the arrangements entered were flawed then that is the course of action that should have been taken. -- 26 of 29 -- QR218-08 / Page 27 of 29 30. In regard to the point of time at which the applicant became aware that the arrangements were flawed, Mr Ross McSwain in his statement of 18 January 2010 stated that: “Interest was payable on the loan which initially was paid until on my advice I advised Mr Armstrong from continuing with the payments once we became aware that the ATO were investigating these types of investment strategies. That advice was given because I considered the money would simply be wasted if there was something wrong with the arrangement.” At the hearing Mr Armstrong gave oral evidence that: “the interest on the loan was $3,000 per quarter and he had paid it for a year and half that he had stopped in 2001 and that part of the reason he had stopped paying it was the introduction of the GST.” Mr McSwain stated in oral evidence that: “He believed he had advised Mr Armstrong in 2001 that the Australian Taxation Office were investigating and that he had extensive discussions with him which he could not recall.” Mr Armstrong later stated in oral evidence that: “He was told arrangements were up in the air. I was of the opinion it was going to go one way or the other not to do anything until it was finalised, until scheme was knocked on the head. He did not take any steps. He expected to be informed by Mr McSwain”. The Tribunal notes that in the decision of the Administrative Appeals Tribunal Mr Armstrong is stated to have said “that since 27 April 2000 he had not paid any interest on the loan”. This also correlates with references in the Australian Taxation Office statement of reasons to a letter dated 31 December 2002 from United Overseas Credit Limited to Mr Armstrong showing a payment having been made on 27 April 2000. Whether the last payment was made in the year 2000 or 2001 it is clear that at least in 2001 Mr Armstrong was aware that there were issues with the arrangements. This would have been an appropriate time to get advice as to whether or not the claim for the deduction was maintainable so that if the claim was not maintainable voluntary disclosure could be made to the Australian Taxation Office which would have had the effect of reducing the penalty and interest component of the taxation debt. The Tribunal further notes that the income tax return for the 1999 year may not have been lodged til 2003 in accordance with the applicants statement of 4 March 2003 and therefore if advice had been obtained prior to the ATO audit and lodgement of the return there would have been no penalty which would have reduced the debt as interest only would have been charged. It should be noted that the penalty and interest component of the overall debt amounted to $219,882.81. The Tribunal finds that the applicant did not take all reasonable step in respect of obtaining appropriate financial and legal advice in regard to the arrangements promoted by the Harts Accounting Group both at the time the original advice was given and at the time when the applicant became aware that the Australian Taxation Office was investigating the arrangements promoted by the Harts Accounting Group. It was not reasonable for the applicant to wait until the scheme was knocked on the -- 27 of 29 -- QR218-08 / Page 28 of 29 head in particular having regard to the penalty and interest powers of the ATO which have the affect of potentially greatly increasing any indebtedness to the ATO. 31. On the evidence of both Mr Armstrong and Mr McSwain the company stopped trading in mid-2005 and it was on 10 March 2005 that the Australian Taxation Office had disallowed the objection to the assessments. Both Mr Armstrong and Mr McSwain stated in evidence to the Tribunal that the company paid out its other creditors and Mr Armstrong confirmed that after payment of all other creditors there were no funds available and that the debt due to the Australian Taxation Office had not been paid as it was disputed. Mr Armstrong had stated that it was not considered possible for the company to trade out of the debt due to its size. Therefore at the time the Company was undertaking its appeal to the Administrative Appeal Tribunal it was a shell and if the appeal was lost the company had no capacity to pay the disputed debt owing to the Australian Taxation Office. The taking of this step, that is the company ceasing to trade and paying out its other debts, therefore helped to assure that the relevant event would happen if the appeal was lost. This goes to the action taken by the Applicant in respect to making appropriate provision for Commonwealth and State taxation debts. A reasonable step in this regard would have been setting aside an amount sufficient to pay the disputed debt if the decision went against the Company. The Tribunal notes that the Company did not pay any amount from its own funds in 1999 in respect of the claimed deduction of $510,000 and those funds were loaned to the Company by Mr Armstrong, therefore the Company should have had substantial funds available to it to be set aside in case there was an adverse ruling by the Australian Taxation Office. The applicant raised the fact that the amended assessment which created the liability was raised many years after the transactions were entered as a ground for not providing for the debt on the basis that it was not reasonable to provide for a debt which was unknown. The tribunal does not accept this argument. The Company entered an arrangement in 1999 which was outside of normal trading and knew in at least 2001 that the ATO was investigating the arrangements. Also the amended assessment was not issued many years after the Company’s income tax return for the relevant year was lodged as the relevant return was probably lodged in 2003 and the amended assessment issued in 2004. 32. It was also within the Company’s control to minimise the amount of the debt in regard to penalty and interest by co-operating with the Australian Taxation Office in a timely fashion. While Mr Armstrong and Mr McSwain say they co-operated with the Australian Taxation Office as best they could, this is not borne out by the Australian Taxation Office statement of reasons which shows that there were long delays in response to correspondence and finally a section 264 notice was required to be issued to Mr Armstrong and, even when an objection was received to the amended assessments, no reply was received from the Company in regard to further queries from the Australian Taxation Office. There were also no attempts to negotiate with the Australian Taxation Office in regard to payment of the debt at any point and this would have been a reasonable step, in accordance with the decision in Eliaba v Queensland Building Services Authority [2009] CCT QR035-09. Instead the Company was allowed to fall into liquidation as, by the stage of the decision of Administrative Appeals Tribunal, there was no capacity to pay any debt. The Tribunal finds that the applicant did not make appropriate provision for Commonwealth or state taxation debts. The fact that the debt was disputed does not mean that the company is not -- 28 of 29 -- QR218-08 / Page 29 of 29 required to provide for it so that in case the final decision goes against the company it is able to pay the debt and thus avoid liquidation. 33. The Tribunal must have regard to action taken by the Applicant in relation to the matters set out in section 56AD(8A) of the QBSA Act. The Applicant stated that there were no other relevant factors which would have lead to the conclusion that I should not be a permitted. The onus is on the Applicant to prove this is the case and there has been no corroboration in regard to the other matters set out in section 56AD(8A) of the QBSA Act, while the Respondent submitted that adverse findings should be made by the tribunal on the basis of lack of proof in regard to these other matters it was not necessary. The Tribunal is not satisfied on the evidence before it in relation to section 56AD(8A)(b) seeking appropriate financial or legal advice before entering into financial or business arrangements or conducting business and section 56(AD)8(f) making appropriate provision for Commonwealth and state taxation debts that the Applicant has taken all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of the relevant event, that is the inability of the Company to pay the Australian Taxation debt. The Tribunal affirms the decision of the Respondent not to categorise the Applicant as a permitted individual. -- 29 of 29 --