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24 Feb 2009
Appeal Status
Not appealed

The Commissioner is correct not to exercise statutory discretion

2009 case note - CIR correct not to exercise discretion at section 141KB to remit a short fall penalty.

TRA 017/08 Decision 5/2009

Tax Administration Act 1994


The Commissioner was correct not to exercise his discretion at section 141KB to remit a short fall penalty.

Impact of decision

Limited as section 141KB has since been repealed.


The taxpayer partnership sold property as part of its GST activity. This was thought to be zero rated but was in fact subject to GST. The purchaser paid the GST portion. The taxpayers' solicitor sent numerous items of correspondence referring, indirectly, to this. However, the taxpayers failed to account for GST. Although they blamed this on their office manager, it appears the correspondence from their solicitor was not provided by the taxpayers to their office manager.

Upon being contacted by the Department the taxpayers executed an agreed adjustment. The Commissioner took the view that a shortfall penalty for an unacceptable tax position was appropriate. The taxpayer was entitled to a "good behaviour discount". The shortfall penalty was not disputed.

Subsequently the taxpayers asked the Commissioner to exercise his discretion under section 141KB of the Tax Administration Act 1994 (TAA). The Commissioner declined to do so, on the basis that the taxpayers did not satisfy the conditions of that section.

The taxpayers commenced a dispute and ultimately a challenge to the Taxation Review Authority (TRA).


The TRA found for the Commissioner saying: (42) I agree with Mr. Wallace that the disputants do not meet the cumulative criteria found at section 141KB (2) of the Act which would allow the Commissioner to consider exercising the discretion found at section141KB(1) of the Act. (43) The Commissioner accepts that there was a "clear mistake or simple oversight" by the disputants within the meaning of section 141KB(2)(1). This pre-condition in the section is not in dispute.

(44) However, the disputants failed to make a voluntary disclosure of the tax shortfall within the meaning of section 141G(1) of the Act. I understand that the disputants accept that no voluntary disclosure was made, and do not rely upon this ground in section 141 KB (2)(a)(ii). As section 141 KB (2) (a)(ii) contains two alternative criteria, the disputants' failure to satisfy this criterion is not necessarily fatal to the exercise of the discretion in that section. That other criterion is that the tax shortfall is "temporary" under section 141l(3). I consider that the disputants' tax shortfall was not a temporary tax shortfall within the meaning of section 141l of the Act as it was not permanently reversed or corrected before the disputants were first notified of a pending tax audit or investigation on 26 March 2005.

(47) I agree that the taxpayer fails to meet the element of section 141l(3)(d) that the tax shortfall was permanently reversed or corrected before the taxpayer was first notified of a pending tax audit or investigation.

(48) Also, I agree with Mr. Wallace (and I explain below) that it is not appropriate in this particular case, that the taxpayer not be liable for the shortfall penalty. Accordingly, the disputants failed to satisfy section 141KB(2)(a)(iii).

(at paragraph [44] the last line should refer to 26 May 2005). 

The Judge considered section 141KB (2) (a) (iii) stating in paragraph (66):

  • (66) The Act does not identify what factors should be considered when determining whether or not it is appropriate to remit a shortfall penalty on the taxpayer, but the Act seems to focus upon the circumstances of the case relating to the particular taxpayer for whom remission is to be considered. Here, the disputants were appropriately subject to the shortfall penalty for the following reasons:
    1. They had the benefit of legal advice in respect of the GST implications of the sale of the property.
    2. They were sent reporting letters from their lawyers (dated 27 January 2005 and 28 January 2005) regarding the property sale.
    3. They were sent a final statement from their lawyer showing the deposit of $1,097,864.24 to their bank account and showing a precise break down of that sum. This settlement shows, on even a cursory glance, the payment of $997,375.00 (and a deposit of $97,500.00) being much greater than the agreed sum in the sale and purchase agreement of $975,000.00 (dated 2 February 2005). It was made clear that the GST on the sale had been collected from the purchaser

Barber J then considered whether or not there were grounds for the exercise of sections 6 and 6A of the TAA. He concluded at paragraph [76] that:

  • "while it is possible that the overarching role of sections 6 and 6A could be a relevant consideration regarding the application of section141KB (2)(a)(111) when considering if it is appropriate to remit the penalty, on the facts of this case, I find that it is not appropriate to do so. The factors in section 141KB are cumulative. Satisfying section 141KB (2)(a) (111) even with the aid of section 6 and section 6A, will not assist the disputants if, they cannot meet the other criteria for cancellation under section 141KB."

His Honour considered that, given the actual knowledge of the taxpayers and the imputed knowledge from their solicitor, using the section would be against the perceptions of integrity (par [77]).