Tax & ATO News Australia

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Deputy Commissioner of Taxation v Ma [2017] FCA 1317

In the recent decision of Deputy Commissioner of Taxation v Ma, the Federal Court has examined an application by the Deputy Commissioner seeking interlocutory relief by way of freezing order against three respondents.

The relief sought by the Deputy Commissioner, is followed by separate proceedings by the Deputy Commissioner to recover accrued tax liabilities owed by the respondents to the New Zealand Commissioner for Inland Revenue as provided by Article 27 of the Australia New Zealand Double Taxation Agreement.

Pursuant to s 263-30 of the Taxation Administration Act 1953, upon registration of a foreign revenue claim, the amounts owed to a foreign revenue authority become pecuniary liability to the Commonwealth of Australia. In the present case, the tax debt were correctly registered and the required notice was given to the respondents.

Mortimer J in granting the interim relief sought by the Deputy Commissioner discussed the necessary elements for the Court to exercise its discretion. Each element and the relevant findings were as follows:

1. The Applicant must have a reasonably arguable case, both on the law and facts.

Mortimer J was satisfied that the evidence clearly showed that the Deputy Commissioner had a reasonably arguable case as the debt owed to the New Zealand Commissioner of Inland Revenue was duly registered. Thus, the Deputy Commissioner was entitled to the debt. 

2. A danger that a prospective judgement will be wholly or partially unsatisfied because the assets of the prospective judgement debtor will be removed from Australia or disposed, dealt with or diminished in value.

Each debt registered against the three respondents were of significant value. Although there was no evidence of a positive intention on the part of any of the respondents to frustrate the judgement of the Court, Mortimer J was satisfied that from the evidence an inference can be drawn that there is a real risk or danger that the respondent might attempt.

In drawing such an inference, Mortimer J examined several categories of evidence that demonstrated a real risk of deliberate dissipation existed, which are discussed below:

  • (a) On the evidence, the first respondent conducted serious transactions as an authorised person to an account owned by a Chinese national. On these facts, Mortimer J found “the first respondent appears to be concealing his financial activities behind the façade of another person through the use of this bank account.”
  • (b) After the first and second respondent were notified of their tax debt they proceeded to put their Australian properties, either owned personally or through a corporation (under their control) on the market for sale.
  • (c) Following the Deputy Commissioner notifying the first and second respondent of the foreign revenue claim and subsequent garnishee notices, they transferred substantial funds from Australia to China.
  • (d) Other dishonest behaviour exhibited by the first and third respondents as directors of companies that have claimed and been paid large amounts of Goods and Services Tax credits, which they were not entitled to.

Accordingly, on the basis of the evidence discussed Mortimer J recognised that their behaviour gave rise to an inference that there is a real and not fanciful risk that each of the respondents may seek to dissipate or dispose assets should the orders not be made.

3. The balance of convenience favours granting of the freezing order

Mortimer J was satisfied the balance of convenience favours making the freezing order, accounting for the undertakings proffered by the Deputy Commissioner.

In granting the freezing order sought by the Deputy Commissioner, Mortimer J found that providing an exception for the respondents to deal with or dispose of assets in the ordinary court of business was not appropriate in the present context. In light of the risks demonstrated on the evidence, the respondents may use the exception improperly and inappropriately. 

Posted in: Tax & ATO News Australia at 22 November 17

Ham and Tax Practitioners Board (Taxation) [2017] AATA 1642

An appeal has been lodged by the applicant tax agent against the decision of Ham and Tax Practitioners Board, whereby the AAT affirmed the decision of the Tax Practitioners Board (TPB) to reject Mr Ham’s application for renewal of registration, on the basis he is not a ‘fit and proper person’ within the meaning of the Tax Agent Services Act 2009 (TAS Act). 

The TPB’s refusal to renew Mr Ham’s registration arose following the decision of Themis Holdings Pty Ltd v Canehire Pty Ltd & Anor [2014] QSC and the subsequent appeal. In summary, Philippides J found Mr Ham, as the sole director of Canhire Pty Ltd, knowingly breached his fiduciary duties and acted dishonestly in paying away proceeds of a sale, which lawfully belonged to beneficiaries of a trust.

Accordingly, on the basis of Mr Ham’s conduct following the Supreme Court decision, the TPD rejected Mr Ham’s application to renewal on the grounds he was not a ‘fit and proper person’.

Subsequently, Mr Ham sought to have the TPD’s decision reviewed by the AAT.

In determining whether Mr Ham satisfied the definition of a ‘fit and proper person’ for the purposes of the TAS Act, the Tribunal held that it was entitled to rely on the findings of the Philippides J in the Supreme Court judgement as evidence for its own findings.

The Tribunal in concluding it was entitled to rely on the findings of the Supreme Court referred to s33(1)(c) of the Administrative Appeals Tribunal Act 1975 (AAT Act), which provides ‘the Tribunal may inform itself on any matter in such a manner as it thinks it appropriate’.

Accordingly, in conjunction with the Tribunal’s objectives in section 2A of the AAT Act, and present case it concluded that:

  • the most expeditors and efficient means by which the Tribunal can inform itself is by reference to the Supreme Court findings;
  • it would be too costly and time consuming to effectively conduct a re-hearing; and
  • the potential unfairness to Mr Ham was reduced as he was represented in both proceedings and had the opportunity to lead further evidence.


With regard to the question of whether Mr Ham is a fit and proper person, the Tribunal considered Mr Ham’s conduct ‘inconsistent, not only with the qualities of strong moral principle, uprightness and honestly, but also with the atmosphere of mutual trust, that underpins a tax agent’s relationship with his or her clients, the ATO and the Tax Practitioners Board’.

The Tribunal further recognised that Mr Ham failed to take steps to redress his actions, despite having ample opportunity to do so.

Mr Ham sought to argue that he is a ‘fit and proper person’ as he has expressed insight and contrition. However, the Tribunal was not persuaded for the following reasons:

  • Mr Ham’s contrition was late, his letter to the Tax Practitioners Board contained no expression of contrition or remorse;
  • It was inconsistent for Mr Ham to state he “unreservedly” accepts the Supreme Court’s decision, yet he continues to maintain his own version of event;
  • It was inconsistent for Mr Ham to realise the unethical nature of his conduct yet contest it at future disciplinary proceedings; and
  • Mr Ham’s proposed systems to prevent future misconduct demonstrated an oversimplified of the conduct found by the Supreme Court

At the hearing, Mr Ham indicated he would be prepared to abide by two conditions should his registration be renewed:

  • furnish a written report to the TPB at the end of each month for 12 months identifying any transactions he or his associated entities entered into; and
  • undertaking a Professional Development Business Ethics Training Course.

The Tribunal in response to the restrictions proposed by Mr Ham, found that ‘the imposition of conditions is not intended to be an alternative avenue for an applicant who fails to satisfy the standard of fitness and proprietary’.

Posted in: Tax & ATO News Australia at 16 November 17

Shord v Commissioner of Taxation

 The case is reasonably unremarkable for any legal or factual analysis, but it does provide a good insight into the attitude of the ATO towards acting as a uncompromising litigant, which makes the most of every possible procedural point, as opposed to a model litigant as they are required.

Justice Logan from Qld made some fantastic comments (with respect);

 

The standard of fair play expected of the Crown and its officers in litigation is a standard in keeping both with the avoidance of behaviours that, in an extreme form, led to the civil war and with the later constitutional settlement. Once this heritage is understood, the requirement for its observance is, or should be, as Griffith CJ stated, “elementary”.

 

I note that Robert Gottleibsen also discussed this case and raised these comments in yesterday’s Australian.

 

Shord v Commissioner of Taxation [2017] FCAFC 167


Between 2006 and 2011, Mr Shord worked on various overseas assignments as a supervisor for foreign companies in the oil and gas industry. He did not lodge tax returns for that period, believing he was a non-resident. The Commissioner believed otherwise and issued amended assessments including all Mr Shord’s foreign income. The Commissioner disallowed Mr Shord’s objection.

The Tribunal found in favour of the Commissioner. The Tribunal found Mr Shord was a resident and, in particular, that his income was not exempt pursuant to s 23AG of the ITAA36. This provision exempts income of residents engaged in foreign services for a continuous period of not less than 91 days.

At the onset of the hearing, counsel for the Commissioner withdrew a contention that Mr Shord’s circumstances failed to meet the legislation’s definition of ‘foreign services’. The Tribunal nonetheless found that Mr Shord did not meet this definition. Fletcher v FCT is authority that a taxpayer is denied procedural fairness when a Tribunal makes a decision on the basis not argued by any party.

Procedural fairness was not raised on appeal to the Federal Court. Instead, the first two questions of law related to the proper application of s 23AG. These hinged on the third question which was whether the Tribunal had jurisdiction to decide whether Mr Shord was engaged in ‘foreign services’. The fourth question was whether Mr Shord was entitled to offsets for foreign taxes paid. The primary judge found against Mr Shord on the third and fourth question and did not therefore consider the first two.

On appeal to the Full Federal Court, procedural fairness was finally raised by Mr Shord as the first ground in an amended notice of appeal. The Commissioner initially objected to the amendment but eventually conceded the ground to Mr Shord. The Full Court thus remitted the matter to the Federal Court to decide the two questions about s 23AG. Unlike the majority, Justice Logan reprimanded the Commissioner, as a representative of the Commonwealth, for its failure to act as a model litigant and raise the crucial issue earlier.

The second ground related to Mr Shord’s entitlement to tax offsets. The Full Court found that Mr Shord did not produce any evidence as to what, when and how much foreign tax he paid, and that neither the Tribunal nor the Commissioner had an obligation to help him adduce evidence to the contrary.
 

Posted in: Tax & ATO News Australia at 01 November 17

Moignard And Commissioner Of Taxation:

This is an interesting decision of the AAT in relation to trust distributions. Much of the analysis it unsurprising, but the trust disclaimer argument would have been of great interest had it had a better run.  With the greatest of respect to Mr Moignard this case also shows the difficultly of representing yourself in tax cases, even before the case gets to the more formal jurisdiction of the Federal Court (eg, on objections with the ATO, or at the AAT). Raising matters at the last minute never find favour with the courts and tribunals, and getting early advice about the potential arguments is critical.


Quick Summary:

  • Commissioner issued an amended assessment for $243,959.84 and imposing a penalty of $187,043.45 for 2007-8 FY.
  • Taxpayer sought to introduce a ‘capital argument’, which the tribunal disallowed.
  • Commissioner advanced alternative argument that the taxpayer was presently entitled to one third of the $480,476, which was the net profit from the sale of a property held by the trust. On the basis that the default provision of the RST Deed provided where there has been no exercise of trustee discretion to pay, apply or set aside the Deed had the effect of making the taxpayer and his two children entitled to the net profits in equal shares.
  • Bean DP found that the default clause of the trust deed operated, the amounts assessed by the Commissioner were excessive being “$51,671.10 versus $195,814.20”.
  • Bean DP found the written resolution and the “certificate” did not support a valid distribution to another trust as they were produced well after financial year in question.
  • Bean DP found the taxpayer’s true entitlement did not come to his knowledge before making the disclaimer, thus it was not effective.
  • Bean DP agreed with the Commissioners Moignard application of 50% penalties for the taxpayer’s recklessness as he had the capacity and resources which should have enabled him to arrive at a better and more accurate understanding of what his true taxation liability was. 


Article Summary:

This is an interesting decision of the Administrative Appeals Tribunal (‘AAT’) in relation to trust distributions. Much of the analysis is unsurprising, but the trust disclaimer argument would have been of great interest had it had a better run.
 

On 18 October the AAT released its decision in relation to the rehearing of Moignard and Commissioner of Taxation, following an appeal to the Federal Court.
 

Upon the rehearing of the matter, the Commissioner sought to advance his alternative argument that the trustee did not exercise their discretion to pay, apply or set aside the trust income. On this basis, the default provisions of the trust deed would apply to deem trust income be distributed equally between the taxpayer and his two children.
 

In light of the Commissioner’s abandonment of his primary argument, the taxpayer sought to include a new argument, which Bean DP dismissed given it was raised at a very late stage of the proceedings.
 

The taxpayer sought to argue that it had made a valid distribution during the 2007-8 financial years, which was supported by a written resolution and certificate made in April 2011. Bean DP agreeing with the Commissioner concluded that the resolution was not made until well after the end of the relevant accounting period, and therefore could not amount a determination to distribute.
 

Additionally, the taxpayer contended that the taxpayer disclaimed the purported distribution of funds” from the sale of the property. However, the Tribunal rejected this argument, finding that the disclaimer did not relate to the actual share of the taxpayer’s trust income and was clearly not made on the basis of an understanding of the operation of the deed or the share of the trust income to which he was entitled.
 

Bean DP found that in order for a disclaimer to be effective, the disclaimer would have to indicate or be made on the basis of an understanding of what the taxpayer’s entitle actually was.
 

One of the final issues the Tribunal addressed was the appropriate penalties. The Commissioner sought to apply a 50% administrative penalty for Mr Moignard’s recklessness in complying with tax laws. The Tribunal taking into account Mr Moignard’s extensive qualifications and commercial experiences found that he “had capacity and resources which should have enabled him to arrive at a better and more accurate understanding of what his true taxation liability was.” Accordingly, the Tribunal agreed with the Commissioners application of a 50% administrative penalty.

In conclusion, Moignard and Commissioner of Taxation shows the importance of understanding the terms of a trust deed and ensuring the appropriate documents for distributions are recorded in the same accounting period.



 

Posted in: Tax & ATO News Australia at 25 October 17

The Simple Solution to Solve the Budget

I have had an epiphany.

I can solve the budget shortfall for the Federal Government by showing the Treasurer how to raise unlimited revenue. My plan is simple. The legislation is already in place and the Courts and the AAT have shown us that it is possible.

We are going to tax dead people.

I am not talking about an estate tax, or death duty. That would be politically unpopular.

No, what I am proposing is that the ATO issue default assessments under s167 of the ITAA 36 to every single person who has died in Australia since 1936. How can the Government do this, you wonder? That’s the beautiful part of my plan – all the ATO has to do is to make a determination under s170 that every deceased tax payer avoided tax due to fraud or evasion. Then the ATO can go as far back as it likes and raise new assessments.

The Courts have said time and again in cases like Rigoli and Futuris that the ATO does not even need to try very hard to come up with a figure. They just need to have a bit of an educated guess and then it’s up to the taxpayer to prove that this figure is wrong.

So each deceased taxpayer can get a tax assessment for, say, $10m. Section 177 means that’s proof they owe the tax. And the proof of tax evasion? Well, the ATO doesn’t need to prove that either. That’s up to the taxpayer too. If a figleaf of justification was required (and it’s not, according to the Courts) the ATO will say what it always does in such cases – any taxpayer who owed such a large amount of money must have known they had more tax to pay. Ergo they deliberately understated their taxable income, ergo tax evasion.

Cheating non-taxpaying bastards. We’d lock them up if they weren’t already dead. On the otherhand, fortunately for the Government, being dead makes it hard for the taxpayer to prove their case. If there is a material witness to a question of fact, Jones v Dunkel says you have to produce them to give that evidence or risk an adverse factual finding. And no-one is more material to a question of tax evasion by a taxpayer than the taxpayer him or herself.

The plan is foolproof. Naturally it’s extremely unlikely any money will be collected from estates that have already been distributed and finalised, but quite alot of people will probably cough up a couple of million each to save the cost and expense of having to fight a losing battle against the ATO, with their unlimited litigation budgets.

This was right in front of our eyes the whole time. The Courts and the AAT have already sanctioned it, as recently as last week. Check out this if you don’t believe me.

Well, that’s that problem solved. I’m off to the middle east next to solve that little pickle by introducing effective Workplace Health and Safety Laws.
  

Posted in: Tax & ATO News Australia at 09 July 15

High Court Case helps determine questions of facts vs. questions of law in AAT hearings

The ATO has recently released a decision impact statement on a High Court tax case that SMH Tax Lawyers won last year, Commissioner of Taxation v Crown Insurance Limited.

 

The ATO concluded that this case has no precedential value and is confined to its facts (which begs the question as to why they wasted tax payers money and that of our client pursuing the matter through to the High Court and losing), but we respectfully disagree.
 
Quite aside from clarifying issues regarding the source of overseas income, this case was very important in helping to determine what matters are questions of facts (and therefore not able to be appealed to the Federal Court after an Administrative Appeals Tribunal decision) and what are questions of law (and therefore can be appealed).
 
This question is at the heart of very many appeals from the AAT.
 
It also emphasises how important it is to present the facts in a clear, concise and compelling matter in AAT hearings.  If you do not get the facts right in AAT hearings (which the vast majority of taxpayers do not), then your chances of losing are very high and your chances of successfully appealing are negligible.
 
At SMH Tax Lawyers one of our most critical specialist roles is helping our clients present the facts properly.  This is something we are uniquely placed to assist with as lawyers with specialist litigation and tax experience and the resources to work with our clients in forensically examining complicated facts which can cover many years, and often many countries.
 
With this assistance, our clients have achieved highly successful results in tax litigation matters against the ATO.
 

Posted in: Tax & ATO News Australia at 24 January 14

Crown Insurance Services Limited wins in High Court against ATO

A long running fight between one of my clients and the ATO has had its final battle in the High Court on 6 June 2013.

 

Crown Insurance Services Limited, an offshore insurance company, succeeded in the High Court on 6 June 2013 in an application brought by the ATO to appeal against a Full Federal Court decision regarding the source of Crown Insurance's income. The ATO had lost in the Full Federal Court following an appeal from its loss in the Administrative Appeals Tribunal. A significant amount of tax was at stake in a case which could have had major ramifications for overseas companies which have dealings with Australian companies.
 
The ATO's case was that because Crown Insurance dealt with related Australian companies, which made their income from Australia, Crown Insurance's income was indirectly derived from Australian sources.
 
In running their appeals, the ATO ignored several High Court and other authorities over many years.
 
The ATO also argued that there should be a change of law on the determination of appeals from lower courts and tribunals.  Appeals from the AAT must be on a question of law and the ATO argued for a significant extension in the jurisdiction of the Federal Court to hear appeals.  The ATO was attempting to overturn long standing decisions including Pozzolanic Enterprises Pty Ltd v Collector of Customs and Collector of Customs v Agfa Gevaert. The effect of such a change of law would be to complicate appeals from the AAT and potentially turn all such appeals into a virtual re-hearing of the original decision.  This would add greatly to the already considerable cost of litigation in Australia.
 
Our client is immensely relieved at the win, but frustrated that the ATO has taken such a long time and wasted so much money fighting appeals that seemed doomed to failure from the outset.
 

Posted in: Tax & ATO News Australia at 07 June 13

Get your affairs in order before you leave Australia

Are you thinking about leaving Australia to take up a new job? Do you realise that you might be taxed in Australia on the income which you earn overseas? Seeking professional advice from a tax lawyer is imperative as they can provide you with the advice which you need to get your affairs in order so that you do not get surprised by an alarming tax bill.

 

If you are an Australian resident, you are taxed on income that you earn overseas. For example, if you accept a job in Dubai, you will be taxed in Australia on the income which you earn there. On the other hand, if you are a non-resident, you are only taxed on income which is sourced in Australia.
 
The residency tests used by the ATO to determine your residency status for tax purposes are not the same as those used by other Australian agencies, such as the Department of Immigration.

The main test that the ATO uses is the “resides test”. Basically, the ATO will look at whether you reside in Australia according to the ordinary meaning of “reside”.

If you do not satisfy this test, then the ATO may also look at any of the following tests:

• Have you been in Australia for more than 183 days in any year? (183 day test);
• Is your domicile in Australia? If it is, have you established a permanent place of abode outside of Australia (Domicile test); and
• Are you a current Commonwealth government employee? (Superannuation test).

The most contentious of these tests is the domicile test. Two recent AAT decisions found in favour of the ATO because although the taxpayers did not reside in Australia, the taxpayers were considered Australian residents for tax purposes because they failed to establish permanent places of abode outside Australia. In both cases, the taxpayers accepted employment overseas - one as a marine engineer in Dubai, the other as an operations technician in southern Oman. As the taxpayers were required to travel as part of their employment, both taxpayers lived in shared accommodation, but only spent a limited amount of time there. On this basis, the AAT held that the taxpayers had failed to establish permanent places of abode outside Australia.  In one case, the AAT described the taxpayer as a “citizen of the world”.

These cases clearly demonstrate that you need to carefully organise your affairs before you leave Australia.
 

Posted in: Tax & ATO News Australia at 05 June 13

ATO not allowed to amend an assessment outside the two year period

For most individuals, the ATO has two years to amend an assessment after the individual has received the notice of assessment. Recently in Elliott, the AAT held that the ATO was not entitled to amend the taxpayer’s assessment outside of the two year period.

 

The taxpayer was employed as a pilot by a wholly owned subsidiary of Cathay Pacific. The taxpayer was in receipt of foreign earnings which he treated in his 2006 and 2007 returns as exempt. However, in Overseas Aircrew Basing Ltd, the Federal Court held that such income was not exempt and on this basis, the ATO tried to amend the taxpayer’s assessment outside the two year period.
 
The ATO argued that it was entitled to amend outside the two year period because the two year rule is qualified by the Income Tax Regulations 1936 (Cth). In particular, the ATO tried to rely on Regulation 20 Item 5 of the regulations which provides that the taxpayer has not identified income from one or more foreign transactions for the purposes of, or in the course of, the assessment. The ATO contended that the taxpayer had not 'identified' the relevant income because he had not 'identified' the income under the correct label in his returns.
 
The Tribunal found that, in the context of Regulation 20, the applicant only needed to identify in his returns an amount of income from a foreign transaction, as he had, and that he did not have to go the further step and make a correct assessment about whether that income was exempt or assessable.
 
I am pleased by the outcome of this decision as it prevents the ATO from pushing the boundaries on these time limits. It is also interesting that the ATO supports this decision. On 5 October 2012, the ATO released a Decision Impact Statement stating that, “[it] accepts that the Tribunal's view of the interpretation of Item 5 of Regulation 20, and its application of that view to the facts in this case, were properly open to it”.

Posted in: Tax & ATO News Australia at 08 May 13

ATO affirms Bornstein decision

In an earlier blog I discussed the ATO’s reluctance to exercise its discretion to disregard excess superannuation contributions. You may recall that the Administrative Appeals Tribunal has found in favour of the ATO in all cases except two: Bornstein and Longcake. The ATO has now released a Decision Impact Statement in support of the AAT’s decision in Bornstein.

 

Bornstein concerned a taxpayer who was a sole director, shareholder and employee of a small company. At the end of each financial year Mr Bornstein, as ‘employer’, would make a superannuation contribution into his own superannuation fund. While overseas between 21 June and 8 July 2007, Mr Bornstein emailed his accountant to ask whether a superannuation contribution needed to be made prior to 30 June. Mr Bornstein received no response from his accountant, and decided to check the ATO website to see when the contribution could be made.
 
Mr Bornstein found on the website that an employer has up until 28 July to make a compulsory contribution for the previous quarter in accordance with the Superannuation Guarantee Administration Act 1992 (Cth). However, the site did not identify the consequences of such late payment on the employee under the excess contributions regime. Mr Bornstein was not aware of this parallel regime.
 
In reliance on the belief that a payment on 10 July 2007 would relate to the 2007 income year, Mr Bornstein proceeded to make a contribution. In June 2008 Mr Bornstein made a further contribution to his superannuation fund after confirming with his accountant that this was correct.  The ATO later assessed him for excess contributions tax because of the June 2008 payment.
 
Based on the circumstances, Mr Bornstein applied to the Commissioner to exercise his discretion to disregard the resulting excess contributions. However, the Commissioner did not exercise his discretion to do so.
 
On appeal of the decision, the Tribunal held that the Commissioner’s decision should be set aside and that discretion should be exercised in favour of Mr Bornstein. Senior Member McCabe held that special circumstances existed because there was a “‘perfect storm’ of events, miscommunications and misunderstandings”.
 
The Decision Impact Statement released by the ATO affirms this decision, and states that the decision is consistent with its stated view in PS LA 2008/1. In particular, paragraph 37 of PS LA 2008/1 provides that “each individual case will present a unique set of circumstances that need to be considered and weighed up in forming an opinion. It may not be helpful to focus too closely on each particular circumstance and ask whether it is special. Of itself, one particular matter is unlikely to be special for there would be many other individuals in a similar situation. The question is whether, when the relevant circumstances of the individual and the making of the relevant contribution are looked at in their entirety, they may be fairly described as unusual, uncommon or exceptional so as to warrant the exercise of the discretion”
 
It is not surprising that the ATO has affirmed this decision, as the decision establishes a very high threshold for exercising the discretion. 
 

Posted in: Tax & ATO News Australia at 20 March 13

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Author: David Hughes

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