Background
Prior to entering into the share sale agreement, Adams Bidco Pty Ltd (“Bidco”), the holding company for the landholder, Ingham Enterprises Pty Ltd (“Ingham”), had received advice from its tax lawyers to the effect that “it may be difficult” to succeed on the landholder duty exemption. On the recommendation of the lawyers, Bidco applied for a private ruling to the effect that Ingham was a primary producer for the purpose of s. 163D of the Duties Act 1997.
As part of the due diligence in relation to the proposed acquisition of Ingham, Bidco received separate advice from its lawyers to the effect that “the prospects for claiming the primary production exemption in NSW are low.” The advice also stated “discussions with the OSR have appeared to be favourable” (although the Chief Commissioner disputed there was evidence to support such an assertion).
The Chief Commissioner indicated to Bidco that it would not be issuing a private ruling for various reasons. Consequently, Bidco applied for an exemption from landholder duty on the basis that Ingham is a primary producer for the purpose of s. 163D. The application was made after the share sale agreement was entered into but before completion.
After completion of the agreement, the Chief Commissioner commenced an investigation. Notices were issued to Bidco and others pursuant to s. 72 Taxation Administration Act 1996 (“TAA ”).
The s. 72 notices contained the following words:
“Pursuant to section 72 … please provide to me … the information, instruments and records requested below. This request is made for the purposes of determining the tax liability or potential tax liability of Adams Bidco Pty Ltd.”
Responses were received to the s. 72 notices before the due date for payment of duty, being 27 September 2013.
Shortly before the due date for payment, Bidco received advice as to various options in relation to the payment of duty. That advice included the comment “the choice as to whether or not to settle the duty will depend on your cost of funds.” In the morning of the due date for payment, Inghams and Bidco agreed that no payment of duty would be made on the basis that an exemption had been requested.
Some months later, Bidco received the first indication from the Chief Commissioner (by telephone) that the Chief Commissioner did not consider the exemption from duty applied. The position was confirmed in writing in September 2014 at which time the Chief Commissioner also requested Bidco lodge an acquisition statement, provide updated valuations and pay the duty owing.
Subsequently, Inghams received further advice from its tax lawyers commenting on the estimated amount of duty and suggesting that only 50% of the estimated duty be paid at first instance, because based on recent experiences, “the OSR seemed to be more incentivised … to resolve a dispute where only partial payments had been made…” Accordingly, on 30 September 2014, a payment of 50% of the duty estimated by the lawyers was made and an exempt acquisition statement lodged.
On 16 September 2016, a notice of assessment was issued. In doing so, the Chief Commissioner allowed a partial remission of the penalty tax, exercising the general discretion under s. 33 TAA. Further, in assessing the interest payable by Bidco, the Chief Commissioner remitted 50% of the premium interest in the period between the date of the tax default and the date of the part-payment of primary duty as a result of the Chief Commissioner’s delays during that period.
On 29 November 2016, the balance of the primary duty was paid.
Retaining the original numbering of the issues, the key issues for determination by the Court were:
Issue 2: Whether Bidco, or a person acting on its behalf, took reasonable care to comply with the Duties Act and the TAA. If yes, then no penalty tax was payable by reason of s. 27(3)(a) TAA, and the remaining issues did not arise.
Issue 3: If no to Issue 2, whether Bidco, before being informed by the Defendant that an investigation relating to Bidco was to be carried out, disclosed to the Defendant, in writing, sufficient information to enable the nature and extent of Bidco’s tax default to be determined. If yes, then by reason of s. 28(1) TAA the original amount of the penalty tax payable under s. 26(1) is reduced by 80%.
Issue 4: If no to Issue 2, in the circumstances should any penalty tax payable (after any reduction under s. 28(1)) be remitted in full, or in part, pursuant to s. 33 TAA?
Issue 5: In the circumstances should the interest assessed by the Defendant be remitted under s.25, either in full or in part, to a greater degree than provided for in the notice of assessment?
The statutory framework
Sections 27 and 28 of the TAA relevantly provide as follows:
“27 Amount of penalty tax
(1) The amount of penalty tax payable in respect of a tax default is 25% of the amount of tax unpaid, subject to this Division.
(2) …
(3) The Chief Commissioner may determine that no penalty tax is payable in respect of a tax default if the Chief Commissioner is satisfied that:
(a) the taxpayer (or a person acting on behalf of the taxpayer) took reasonable care to comply with the taxation law, or
(b) …
28 Reduction in penalty tax for disclosure before investigation
(1) The amount of penalty tax determined under section 27 is to be reduced by 80% if, before the Chief Commissioner informs the taxpayer that an investigation relating to the taxpayer is to be carried out, the taxpayer discloses to the Chief Commissioner, in writing, sufficient information to enable the nature and extent of the tax default to be determined.
(2) ...”
Submissions
Issue 2 – reasonable care
Bidco submitted that it had exercised reasonable care for the purpose of s. 27(3)(a) TAA in circumstances where (i) both Inghams and Bidco had obtained legal advice as to the application of the primary producer concession prior to entering into the share sale agreement, and that advice was uncertain and demonstrated that the issue was complex; (ii) there was uncertainty about the quantum of duty payable; (iii) a private ruling was sought from the Chief Commissioner; (iv) after being informed that a private ruling would not be issued, an application was made for exemption from duty.
Bidco relied on the decision of the Victorian Court of Appeal in Commissioner of State Revenue v Snowy Hydro Ltd[1] where the Court considered the meaning of “reasonable care” for the purpose of a virtually identical provision to s. 27. Bidco asserted the Snowy Hydro decision supported its submission that obtaining legal advice and the seeking of a private ruling demonstrate the taking of reasonable care.
Issue 3 – disclosure before an investigation
The Chief Commissioner submitted that the issue of an investigative notice under s. 72 TAA to Bidco amounted to the Chief Commissioner informing “the taxpayer that an investigation relating to the taxpayer is to be carried out.” Bidco submitted there was nothing in the notice that informed it that an investigation relating to it was to be carried out.
Issue 4 – remission of penalty
The penalty tax had been partially remitted by the Chief Commissioner on the basis that it be assessed on the amount of the tax default after allowing for the part-payment the year after the tax default (rather than the full amount of the tax default as required by s. 27(1)). The Chief Commissioner argued that no further remission of penalty tax should be allowed to Bidco.
Issue 5 – remission of interest
See below.
Decision
Issue 2 – reasonable care
The Court concluded that when looking at the question of reasonable care, it is not sufficient to take the steps of obtaining advice and seeking a ruling. Rather, “it is necessary to ask what would be required by way of reasonable care to comply with the taxation law, having regard to the advice that was in fact received”: [113]. In the present case, the advice was clearly qualified.
Her Honour did not agree that the Snowy Hydro case compels a conclusion that reasonable care was taken in this case. When the steps taken by Bidco failed to produce a conclusive answer, the course adopted by Bidco not to pay the duty did not amount to taking reasonable care: [114].
Further, once it was apparent that there would be no private ruling and no decision on the exemption application by the due date for payment, more would have to be done by Bidco to meet the test of reasonable care: [117].
It was held that Bidco failed to establish that it took reasonable care to comply with the taxation law as at the due date for payment: [119].
The Court’s judgment provides some commentary on the opposing views taken by the parties as to the time at which it is necessary to establish the taking of reasonable care. Bidco submitted the relevant time was as at the time of the tax default. The Chief Commissioner submitted that on and from the date of the tax default (ie, the due date for payment), there was a continuing default each day the tax remained unpaid. Her Honour accepted Bidco’s submission in this regard but stated it was not necessary to reach a final view because of her finding that reasonable care had not been established as at the due date for payment: [111].
Issue 3 – disclosure before an investigation
The Court held that, in order for s. 28(1) to operate, it requires there be something that either expressly, or by necessary implication, “informs” the taxpayer that an investigation relating to the taxpayer is to be carried out. It is not sufficient for the taxpayer simply to become aware: [133]. In her Honour’s opinion, the s. 72 notice did not “inform” Bidco that “an investigation relating to the [Plaintiff]” was to be carried out: [137].[2]
Her Honour accepted that Bidco was not informed it was being “investigated” until it received the notice of assessment: [137]-[138].
Accordingly, the Court held that s. 28(1) ought to apply to Bidco so that there is a reduction of 80% of the 25% penalty otherwise payable under s. 27(1).
Issue 4 – remission of penalty
The Court considered that, having regard to the conduct of Bidco (particularly in the period after receiving legal advice) in taking a conscious decision not to pay more than 50% of the duty as assessed by its lawyers, no further remission of penalty tax beyond the partial remission already made by the Chief Commissioner was warranted. Her Honour found that a calculated decision was made as to the cost benefit of each course of action in the full knowledge that there was a real risk that tax was payable: [147]. In her Honour’s opinion, the conduct of Bidco after the due date for payment was relevant to the exercise of the general discretion to remit penalty tax under s. 33: [122].
Issue 5 – remission of interest
In light of the Court’s conclusion on reasonable care, her Honour rejected Bidco’s submission that this should be a basis for remitting the premium component of interest. She considered that the delay in determination of the exemption by the Chief Commissioner did not counterbalance the calculated decision by Bidco not to pay the duty in the period between 27 September 2013 and September 2014 such as to warrant a further reduction beyond the remission allowed by the Chief Commissioner: [162]. Nor was she prepared to remit any part of the market component of interest: [163].
Orders
The Court directed the parties to provide short minutes of orders to reflect the Court’s reasons and brief written submissions in relation to costs.
Link to decision
Adams Bidco Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 702
